Buying out note to have more to exchange..

2 Replies

This is a bit complicated.

Selling a property, large gain, I am 50% owner, planning to separate my proceeds and exchange into another investment property. We are having to carry a small note for the buyer, 1st position but buyer wants language for us to agree to subordinate to 2nd position if he decides to get a construction loan to build.

In an effort to exchange as much as possible I’d like to explore ways to buy out my 50% portion of the note we are carrying for the buyer. Basically I add my 50% of the value of the note in cash, so I can exchange my full half of the proceeds from the sale. If I don’t do this when the note is paid off it will be taxable.

The issue I see is my partner is taking his proceeds a different direction for his exchange, and doesn’t have the 50k cash to buy his portion of the note.

Question- how can I achieve this with out agreeing to be in second position now (and then third of buyer wants us to subordinate for a construction loan)?? Can there be two equal position equal value notes on a property? Ideas?

I know talk to an attorney, I will most likely, not sure if I’ll have time closing very soon. Thanks!

@Tony F. Why not separate and do 2 notes?  You can replace your's once it's in the exchange account so you'll be able to fully defer all tax.  And your partner can take his and do whatever.  Not sure you can help the 2/d/3rd position issue unless you make sure your's is recorded first.

Another option if you have the money is to buy your partners position in the note.  You may be able to get him to do that at a discount.  Again as long as the note first goes into the exchange you can replace it with cash  and still get the full 1031 benefit.

And a third option might be for you to agree to accept less for your share but take it all in cash so all cash goes into your 1031 account.

@Davefoster 


Thanks for all those ideas. That helps. The main issue is the note is 0%... so buying out my partners is a loose.. but maybe I can buy it out for less then face value and turn it into a win. The property is very unique, we carried the small amount at 0% to make it work for the buyer, wouldn’t be easy to find a new buyer quickly. 

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