Can I Purchase my 1031 Exchange Replacement Property on a Contract for Deed?
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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 dont receive the actual deed until I am done making my payments. So, query whether this qualifies as a 1031 Exchange.
The Question is¦Who is the Owner for Federal Tax Purposes
The answer is probably because a Contract for Deed vendee receives the benefits and burdens of ownership. And, you want to make sure that your Contract for Deed is drafted so that it does give you the benefits and burdens of ownership because you bear the risk of loss of the property if destroyed, because you bear the obligation to pay the property taxes, because you have exclusive possession of the property. All of these factors really weigh on the side of you being the equitable owner of the property and the equivalent of the owner of a fee interest in real estate for Federal Tax purposes.
Put the Exchange Funds Down as the Down-Stoke¦
If You are the Owner
 So, you can purchase your replacement property on a Contract for Deed. In theory, you would take all of your proceeds, all of your net proceeds from your relinquished property and plunk that down as your down-payment. Then you would make incremental installment payments going forward until the Contract for Deed is satisfied at which time you would receive the deed for the property. However, in the interim, you are the equitable owner of the property, and that should be sufficient to complete your 1031 Exchange.
About the Author:
Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.
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Comments on Can I Purchase my 1031 Exchange Replacement Property on a Contract for Deed? »
Dear Jeff,
A friend & I own an apartment complex, each owns 50% undivided interest. I want to purchase & he wants to sell. If I buy 50% of his interest or 25% of the total can he use the 1031 rule if he buys like kind of property in the required time period? In another year I would then purchase the remaining portion of his interest & he would do another 1031 exchange. Do you think this would qualify for the 1031 exchange rule & he could defer taxes?
Donald R Typer
I have a book that swears that I can swap zero coupon bonds for the paper that I gave the seller so that he may benefit from triple tax free feature of the bonds, but an "erstwhile" IRS agent says the process is only good up to $10K per transaction. If this is so then can one not use fractional purchasing to incrementally acquire with a series of $10K fractional undivided deeds?