Owner carry -- how to avoid boot -- and not blow up the exchange

[Account Closed]

Can anyone with experience doing an owner carry with a 1031 exchange verify the following?

Do I need to use all my equity, plus the cash I bring to close, and put all of it into the replacement property?

As a simple example, say I'm selling a property for $600k with a $200k loan balance. Buyer gets a $200k owner carry loan.  If I bring $200k to closing to fund the owner carry, do I get that $200k back or do I just get the prom note?  And then do I have to put all the equity ($400k) into the replacement property thru the 1031 exchange?  Or does only $200k have to go into the replacement property?

Better strategies for your 1031 exchange

These strategies are presented in the order which we prefer. In each case, consider a scenario where your buyer is asking for $200,000 of seller carry financing to close the deal:

1. You bring cash to make up the difference

If financially able, you substitute new cash financing for the owner-carried note. That new cash — now a lump-sum and not coming as installments — goes into your 1031x escrow account. In effect, you cover the difference ($200,000) that the buyer is asking for, which allows you to show the IRS that 100% of the money in the sale went directly through your escrow account and toward the purchase of valid 1031x replacement property.

Acting as the lender, you now bring the full amount of cash (the face value of the note) to the closing table. A promissory note and deed of trust would be executed between you and the buyer.

Again, now the full balance of the 1031 exchange is immediately available after the sale and is ready to be used for the replacement property purchase. This strategy is doubly beneficial:

1. The 1031x is completed in an entirely tax-deferred way (including deferral of recaptured depreciation).
2. The tax basis in the note is now its face amount instead of a carried over basis from the relinquished property. This is the best/easiest option for completing the 1031 exchange, but it requires that you have the financial means available!

https://1031x.com/investment-s...

[Dave Foster]

@Account Closed, In order to defer all tax you must do two things - 

1. Purchase at least as much as your net sale ($600K in your example)

2. Use all of the proceeds from the sale in the next purchase or purchases.

.    these proceeds are

.    a. $200K in cash

.    b. a $200K note (this is an asset and a proceed from the sale)

So, to defer all tax you must purchase at least $600K of real estate using $200K in cash and a $200K note.  This can be tough.

1. You can offer the note to the seller of your new property 

2. You can sell the note on the open market

3. Or you can replace the note in your exchange account with cash (what the quote you provided is all about)

Usually #3 is the only feasible option.  The note must go in the exchange.  And sometime before your purchase you replace the note with cash.  At that point you have $400K in cash to be used to purchase at least $600K of real estate.

And outside your exchange you have a note for $200K that you paid $200K for.  So the only taxable profit is from the interest that comes in..

There's a video on our site if you are looking for another resource