Many people ask “Why do I have to assign my purchase agreement to my Qualified Intermediary?” Even more, they ask “Why do I have to give notice that I am assigning my contract to my intermediary to all of the other persons involved in the purchase agreement?” It seems intrusive to have to give everyone notice that you are doing and exchange. Why is it anyone’s business?

Old School Requirements

Let’s go back in time before the current Treasury regulations were in place. We would actually deed or transfer our property to the Intermediary. The Intermediary acted as a straw man, so that they became the seller of the relinquished property and the purchaser of the replacement property. So, your Intermediary actually went into title and then participated in the transfer or the purchase of the property.

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Contract Deeds or Executor Contracts, basically installment sales, create a lot of questions. Here is one that I get a lot. I sold my property ten years ago on an installment sale, a Contract for Deed. And now, I am being paid off, and I am getting this balloon payment from the buyer. Question: Can I do a 1031 Exchange on this windfall of cash that I am receiving?

Understand the Timing - When Did the Sale Take Place

If you look at this transaction, it may appear that the sale is now occurring because when the balloon payment is given to the vendor, the deed will be delivered to the vendee. So, it feels like perhaps the sale is occurring now. But, for Federal Tax purposes, the sale probably occurred ten years ago when the Contract for Deed or the installment sale was entered into.

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A lot of people wonder, “Can I purchase my replacement property on a Contract for Deed?” As financing gets more and more challenging, seller arranged financing looks more appealing. So, if we can find a seller that will convey the property to us on a Contract for Deed, will that property work as a 1031 replacement property?

How Can This Work for a 1031 Exchange…if I do Not have Full Legal Title?

The question might be lingering in the back of your mind. Yes, I know that I am the vendee, but I know that the vendor still has legal title. I also know that as a purchaser under a Contract for Deed, I don’t receive the actual deed until I am done making my payments. So, query whether this qualifies as a 1031 Exchange….

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Sometimes people want to do a 1031 Exchange into a property that they plan on immediately occupying as their home. And, they wonder to themselves – well, I know that I have to treat my replacement property as either business property, property used in my trade, or as investment property. Well, I hope that my personal residence goes up in value, so it must be an investment, right? …

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When you are doing a 1031 Exchange, you generally want to hit three benchmarks called the napkin test. These are generalities that typically bear out to be good indicators of whether or not all of the gains will be deferred in a 1031 Exchange. Here are the benchmarks.

Step One - Equal or Greater Value

One, you typically want to buy a replacement property of equal or greater value than the relinquished property that you gave up. So, we want to go up in value, and get a bigger, better property…

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