Seller wants to 1031 exchange on a morby method.

Member since 2024 · 5 posts · 3 votes

This transaction began as a straightforward Morby Method structure, but the seller has since expressed a desire to complete a 1031 exchange. I’m trying to determine whether this is feasible within this framework.

If anyone has successfully executed a Morby Method transaction in conjunction with a seller’s 1031 exchange, I would greatly appreciate the opportunity to learn from your experience and understand how you structured it.

Thank you in advance.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8mo

@Nicholas Stout, Positives and negatives about this method aside, the sticky point for this transaction would be that the seller who wants to do a 1031 exchange is carrying a note on their sale. The requirement to defer all tax in a 1031 is to use all of the proceeds from the sale in their replacemennt property purchase. This is going to be an amount of cash, and a note from the buyer.

So, that seller will have to either

1. Accept the note and pay the tax on it.

2. Let the note go into the 1031 exchange and either

. -sell it from the 1031 account on the open market (huge discount and not. likely) or

. -replace the note inside the 1031 account with cash from some other source.

If they do the latter then they have the cash in the 1031 account to complete their exchange. And the note they now hold outside the 1031 exchange is tax free except for the interest portion.

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
8mo
What is morby method, if you are referring to subject to and a 1031 then I am gonna say no you can’t because you have to take on new debt and sub to you are not taking on new debt Not tax or legal advice
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William Green
Member since 2016 · 18 posts · 6 votes
8mo
I have been the realtor on a few 1031 stack deals (aka morby method). Theres two ways to do it from what I have found. Escrow officer/CPA show that the amount the seller is carrying is a sales expense and isn't taxed on. Or the seller actually brings the amount of their loan in to close, this can be done with the help of a transaction funder if the seller doesnt have the capital for this. Obviously the first option is better
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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
8mo
Quote from @Nicholas Stout:

This transaction began as a straightforward Morby Method structure, but the seller has since expressed a desire to complete a 1031 exchange. I’m trying to determine whether this is feasible within this framework.

If anyone has successfully executed a Morby Method transaction in conjunction with a seller’s 1031 exchange, I would greatly appreciate the opportunity to learn from your experience and understand how you structured it.

Thank you in advance.
Morby has promulgated several risky and half thought through approaches to obtaining properties, it's unclear which method you are meaning. Just because it was a "completed" transaction, does not mean it would be recognized by the legal system. That being said, if the seller already sold their property using the "Morby" method, it's no longer theirs to sell.

However, if they are now contemplating selling, it is unlikely the "Morby" method will work for the transaction. The obvious question would be "what are they buying in the time period allowed for a 1031, and are you the owner of the property they are buying?" While that is unlikely, it is possible. Why aren't you asking the "Morby Group"?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8mo
@Nicholas Stout, Positives and negatives about this method aside, the sticky point for this transaction would be that the seller who wants to do a 1031 exchange is carrying a note on their sale. The requirement to defer all tax in a 1031 is to use all of the proceeds from the sale in their replacemennt property purchase. This is going to be an amount of cash, and a note from the buyer.
So, that seller will have to either
1. Accept the note and pay the tax on it.
2. Let the note go into the 1031 exchange and either
. -sell it from the 1031 account on the open market (huge discount and not. likely) or
. -replace the note inside the 1031 account with cash from some other source.
If they do the latter then they have the cash in the 1031 account to complete their exchange. And the note they now hold outside the 1031 exchange is tax free except for the interest portion.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
8mo
I think showing the seller carry loan as a selling cost sends you to the front of the IRS line. If your CPA even suggests this you need to RUN. I’m not sure if it’s go to jail fraud (unless you do it more than once.) But it’s certainly a failed 1031, penalties due, depreciation recapture, interest, and the associated taxes.
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