1031 exchange on a down-leg, sold note

[Dory Peters]

Before I get into the meat of my question, I just want to say that I saw a post elsewhere (http://activerain.com/blogsview/459350/Ive-Sold-and-Carried-Paper-Can-I-Still-Close-My-1031-Exchange) that shows the caliber of talent we have here on BP. :rock: The irony was that I just finished reading though 6 or so posts where Bill Exeter gave some great advice--only to have confirmed from another independent source that he knows his stuff cold. :cool:

Although Bill's advice (given indirectly) in that post answered my original question, I'd like to expound further upon his answer here.

The question (someone else asked the same one):

Increasingly, sellers are becoming more flexible and carrying paper (taking back a note) in order to close escrow on their investment properties. So, how does that work in the context of a 1031 exchange? Can it still be done?

The answer:
Sellers who have created a seller carry back note on their down-leg property (which is a good technique for getting top dollar and a quick close), have several options when moving into their up-leg property:

(1) Ask the seller to take an assignment of the note as part of the offer. Usually sellers are not too excited about this option.

(2) The up-leg buyer (note holder) could contribute cash into their own 1031 exchange (boot paid) in order to complete the 1031 exchange. Then they would get the note assigned back to them AFTER the 1031 exchange has been completed (boot received). The boot items net to zero so there is no tax issue.

(3) Sell the note for cash, which is then credited to the up-leg seller to complete the exchange. It's important to remember to have the exchange company listed as the beneficiary on the note. It would also be a good idea to consult with a note professional before you create the note so you know you can sell it for minimum discount.

I'm not sure I fully understand what is meant in statement (2) of the answer: "Then they would get the note assigned back to them AFTER the 1031 exchange has been completed". Is the up-leg buyer or is the end-seller the assignee? The "assigned back" seems to infer that the up-leg buyer is the assignee, but maybe I'm missing someting, because that doesn't appear to make much sense.

Additionally, I'd like a clarification on part of statement (3) of the answer: "It's important to remember to have the exchange company listed as the beneficiary on the note." Why does the exchange company need to be listed as the beneficiary on the note? I thought the beneficiary would be the note buyer. Am I missing something?

The reason why I'm asking these questions is that I'm actually working on a deal where I intend to use these transactions as part of my exit strategy.