Seller Finance to 1031

[Elliot Angus]

Hello, I am looking to purchase part of a portfolio. The scenario is: The seller (ie. John) currently owns 6 properties. John is looking to sell 1-3 properties now and reinvest some of those proceeds into the remaining 3 properties. In 3-5 years, John is looking to sell off his entire portfolio using a deferred tax 1031 exchange. John may find some difficulty selling an entire property package in such short amount of time. 

This is where I believe I can come in. I want to present Investor A with a hefty down payment to cover improvements of his other assets, while also offering owner finance terms so that in the 3-5 year period he can “sell” the properties to me which I have been paying off throughout the time, so that investor A can successfully 1031 into another investment at that time. 

Questions: 

who can I reach out to for proper terms and complete understanding of 1031?

Would investor A be able to defer capital gains in a situation like this?

What other options do I have to acquire these properties?

Any and all information will help!

[Timothy Smith]

This is an interesting situation, and one that I almost navigated with my mentor prior to his passing this last year. I agree with @Tim Delaney that you should reach out to RJ Gullo regarding the 1031 strategy. Russ has a lot of creative solutions and uses established case law to work in ways that some of the more "cut & dry" intermediaries do not. I know from experience -- contact me directly if you want to chat about it. 

My understanding is that in order for Investor A to use the 1031 exchange to defer taxes, he has to purchase replacement property and not use those sale proceeds for his other properties -- or quite frankly, anything else. 

One thing to explore is Equitable Ownership. Again, I am NOT an intermediary, CPA, nor attorney, but it's worth asking a few questions to those respective professionals. You may be able to "buy in" as a partner on certain properties, then buy him out entirely down the road. Your "buy in" funds could potentially be used for improvements to the other properties you mentioned, without triggering a taxable event. Again, and I cannot stress this enough, I am NOT a tax expert on this so you need to talk to a professional. I am, however, a creative thinker that likes to exhaust all avenues before moving on!

Another option is to have him seller finance at a rate and term attractive enough for him to offset the capital gain. It may be a tough rate for you to swallow, but it may be worth it to secure the properties then refinance in a few years. You could structure a win-win situation where Investor A (the seller) gets his proceeds to cover the work on the remaining properties, while holding the note for you. Again, I agree with Tim's point about the wisdom in tying up your cash for so long. Only YOU can determine if that's wise. 

Let me know if you ever want to chat. This is the kind of stuff I love attacking!

- Tim Smith

Resonance REI