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Commercial Partners Title, LLC is dedicated to providing unparalleled customer service, commercial title insurance solutions, and creating great relationships. It is vital that we continue to find ways to execute on these promises to our clients; and with the advancement of social media, we believe we can take our values and ideals to a new level.

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Cordially, Mark

September 24, 2020 by Jeff Peterson

How to Handle Unsecured Debt in a 1031 Exchange

When you’re selling a property in a 1031 exchange, you need to move all of your equity into the new replacement property in order to defer all of your capital gains taxes. However, you are allowed to pay off debt associated with the relinquished property. So how do you handle unsecured debt in a 1031 exchange transaction?

Unsecured Debts

Oftentimes people have recorded mortgages or deeds of trust against the old relinquished property and that’s clearly associated with the property. But what about unsecured debts? What if you’d borrowed $60,000 from you Aunt Matilda and you just had a promissory note or I-owe-you? Is that associated with the property?

One way to tie the debt to the property so that it’s associated with the sold property is to have the note specify that if the subject relinquished property is ever sold the note has to be paid off at the time of closing.

Contractually Tie the Debt to the Sale

Furthermore, you can state in the purchase agreement with your buyer that as a material and substantial condition of this sale, the debt owed to Aunt Matilda must be paid at the time of closing. So you can contractually tie the debt to the sold relinquished property. The regulations state that you can offset the debt relief on the old relinquished property by taking out new debt on the replacement property. That means you can pay off the debts on the old relinquished property without recognizing any gain, provided you offset that debt relief with new debt or new cash in on the replacement side.

The trick is to plan early. Make sure your debts are recorded against the property or that you’re contractually required to dispose of that debt in conjunction with the sale of your old relinquished property.

September 22, 2020 by Jeff Peterson

2 Options for Making a Down Payment in a 1031 Exchange

What happens when you need to make a down payment on the purchase of your replacement property if you’ve already closed on the sale and your qualified intermediary is sitting on a big pile of your exchange funds? Essentially, you’ve got two options at your disposal.

Option 1 – Purchase Agreement

One option is to have a purchase agreement entered into with the seller of your replacement property and then specify that within 2 business days your qualified intermediary will wire transfer in the down payment or earnest money deposit for that purchase.

By giving yourself a couple of days you will have time to take that purchase agreement, give it to the intermediary, and have them prepare the necessary 1031 assignment documents and wire disbursement request forms. That allows the intermediary to step into your shoes as the buyer and provide notice to the seller of your assignment of the purchase agreement (to the qualified intermediary). Once that’s done the intermediary can advance your earnest money deposit or for that matter the entire purchase price if you want them to and that money can be used to acquire your replacement property.

Option 2 – Earnest Money

Alternatively, if it’s too much rigmarole to get you qualified intermediary to wire the money and you’re out there making deals fast & furious, the other way to do it is to have you write your own earnest money check (out of your own pocket) and give it to the seller with your offer. That might make your offer more attractive or enticing and you can always get your deposit back by stating in the purchase agreement my deposit is just a deposit I don’t want it to be applied towards the purchase price and at closing you can give me back my earnest money deposit because I’m coming in with a truckload of 1031 funds that I would apply towards the purchase price instead.

September 21, 2020 by Jeff Peterson

Partial 1031 Exchange Consequences

From an accounting point of view when you’re doing a 1031 exchange, if you want to defer every cent of tax in a 1031 exchange you need to kind of juggle three balls in the air at the same time – value, equity, and debt. In this article, we are going to talk about the consequences of dropping one of these balls and only qualifying for a partial 1031 exchange.

Value

First, you need to continue your investment into like-kind property that is equal or greater value than what you relinquished. If I sell a property for 1 million dollars and I only buy a replacement property for $10,000 the IRS is going to say “hey where is your continuation of investment? We only see this paltry $10,000 replacement property.”

So to the extent you buy down in value you’re going to recognize the gain dollar for dollar to the extent that you have a gain.

Equity

The next ball that we’re juggling is the equity. Whatever net proceeds you have from the sale of your relinquished property, that equity needs to be redeployed into the new replacement property. If you put some of that cash proceeds into my pocket instead of into the replacement property the IRS is going to tax you dollar for dollar to the extent that you put that cash in your pocket. So during the exchange process you don’t want to touch any cash, you want to reinvest all of the proceeds into the new property.

Debt Relief

The last ball we’re juggling is debt relief. To the extent that you pay off mortgages, deeds of trust, liens and debt associated with the relinquished property we need to offset that debt relief with new debt on the replacement property or cash. If you win the Powerball lottery on the way to your replacement property closing and you can pay cash for the replacement property that cash in out-of-pocket will also offset the debt relief.

September 17, 2020 by Jeff Peterson

3 Tips for Selling on a Contract for Deed & Managing a 1031 Exchange

While a selling on contract for deed is usually a good method of seller-back financing because of the harsh and expedient enforcement mechanisms; if the Seller wants to defer 100% of the gains through a 1031 exchange, then it may be more advantageous to convey the Relinquished Property by deed and to take back a Note and Mortgage made in favor of CPEC1031 – Commercial Partners Exchange Company, LLC (the Qualified Intermediary or “QI”).

That way, prior to the purchase of the Replacement Property, the Exchangor can send the QI the outstanding amount due on the Note to buy the Note form the QI. Once the QI has all cash in the 1031 escrow account, all of the Exchangor’s equity (cash proceeds) from the disposition of the Relinquished Property may be applied to the purchase of the Replacement Property.

It is much more cumbersome to get the same result using a contract for deed because it requires the Exchangor to actually deed the Relinquished Property to QI, then the QI has to convey the Relinquished Property to Purchaser by Contract for Deed and later (just prior to the closing of the Replacement Property) the Exchangor has to purchase the contract back from the QI.

3 Rules of Thumb

There are three general rules of thumb to quickly see if you will defer all of the recognition of gain.

Typically you will acquire replacement property that is “up or equal” in Value (price);
You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property;
And to the extent that you were relieved of liabilities and debt, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

Generally, people prefer not to put the QI into the chain of title and want to avoid the extra costs and recording fees that may entail. A Note and Mortgage are just an easier form of seller-back financing when you are loaning your buyer money on the sale of your Relinquished Property and also trying to juggle the requirements for 1031 exchange perspective.

How to Handle Unsecured Debt in a 1031 Exchange

Unsecured Debts

Contractually Tie the Debt to the Sale

2 Options for Making a Down Payment in a 1031 Exchange

Option 1 – Purchase Agreement

Option 2 – Earnest Money

Partial 1031 Exchange Consequences

Value

Equity

Debt Relief

3 Tips for Selling on a Contract for Deed & Managing a 1031 Exchange

3 Rules of Thumb

Contact

Service Area

Blog

Unsecured Debts

Contractually Tie the Debt to the Sale

Option 1 – Purchase Agreement

Option 2 – Earnest Money

Value

Equity

Debt Relief

3 Rules of Thumb

Contact

Service Area

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