Installment product sales and 1031 exchanges that are like-Kind role 1

There are many circumstances for which 1031 exchange that is like-kind change guidelines intersect with those for installment product sales. As an example, whenever an installment purchase includes vendor vendor funding that the vendor desires to accomplish a 1031 change 1031 trade but will likely to be getting some or most of the buyer’s installments beyond the 180 window for concluding the exchange day. There are some other situations aswell by which area 1031 and installment purchase guidelines overlap. The next is a conversation of the way the installment purchase rules interrelate using the guidelines regulating 1031 exchanges.

Seller Financing into the Context of a 1031 change

It’s not uncommon for taxpayer taxpayer to invest in the client customer entirely or perhaps in component. Such deals may or may well not include the vendor’s intent to accomplish a 1031 change. The dwelling regarding the seller’s funding may take the type of a note and home loan home loan /deed of trust through the customer or under Articles of Agreement for Deed. The form that is specific perhaps not influence the seller’s choices in structuring an trade within the deal.

The question frequently arises whether a taxpayer can structure an exchange when the balloon payment becomes due, rather than at the time the parties enter into the installment sale under an installment sale using a note and mortgage/deed of trust. Comparable concerns are raised with Articles of Agreement for Deed – can the trade be performed during the right period of the balloon repayment once the customer gets the deed? It are not able to, since, for taxation and appropriate purposes, the purpose of transfer of ownership takes place when the parties get into the note and home loan or an Articles of Agreement for Deed as opposed to as soon as the balloon repayment is created or once the deed is released.

Taxpayer cash that is receiving a Note

It is rather typical the taxpayer/seller for cash down through the customer and also to carry an email when it comes to extra amount due. In some instances, this arrangement is entered into as the events need to shut, nevertheless the buyer’s financing that is conventional using additional time than anticipated. In this situation, the note must certanly be made payable into the qualified intermediary qualified intermediary (the trade business). The note may simply be substituted for cash from the buyer’s loan to the extent that the buyer can procure the financing from the institutional lender before the taxpayer closes on the replacement property replacement property.

It really is much more likely your taxpayer’s 180 day trade duration change duration will fall ahead of the receipt of funds to the trade account change account. A solution is for the seller to “buy” his own note from his exchange account with fresh cash in this case. Really, the taxpayer improvements individual funds to the replacement home whilst not getting the equivalent amount of money through the customer in those days. These funds may be money your taxpayer currently has available, or it could be from that loan that the taxpayer takes away to choose the note. The advantage to your note buyout is the fact that future principal principal repayments gotten by the taxpayer with time shall be completely income tax deferred.

When you look at the instance above, care must certanly be taken as to if the note (or agreement that is installment ought to be turned up to the taxpayer. There’s a tendency that is natural pass the money and note at the same time. All things considered, the customer is placing in to the change account the very same value that he’s taking out fully. But as the laws prohibit the taxpayer from “right to get cash or other home pursuant into the protection or guaranty arrangement, ” it really is probably simpler to have the money to the account at some point before the purchase of this replacement home, while assigning the note towards the vendor after all of the replacement home happens to be obtained. Some qualified intermediaries has a questionnaire they shall signal acknowledging the replacement of money the note by having a vow to circulate the note upon the closing for the trade account.


There are many situations for which an installment sale make a difference to income tax deferral. In a few instances deferral may be accomplished by the taxpayer’s replacement of money into an change account fully for an installment note or even a purchase under articles of agreement for deed. Within our next post, we examine more complicated circumstances installment that is involving and 1031 exchanges.