The Flip Board

(Listen Here 3:35 min)

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 business?

Old School Requirements

Lets 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.

Modern 1031 Tax Techniques Allows Mere Assignment

Thankfully, today, our Intermediaries do not have to legally take title. We can accomplish the same function by simply assigning to the Intermediary our rights in the relinquished property purchase agreement, or our rights in the replacement property purchase agreement, and that is deemed to be the same as if the Intermediary actually took our property from us, or received the replacement property for our benefit.

Faster, Cheaper¦Direct Deeding for 1031 Exchanges

The benefit here is that we do not have to deed a property. We do not have to pay for extra recording fees, and we do not have to go through all of that extra hassle of actually deeding the intermediary into the chain of title. However, the Treasury regulations say that if you are going to have direct deeding, that is the exchanger deeds the relinquished property to the buyer, and the seller of the replacement property deeds the replacement property to the exchanger. Then, we have to give written notice of this assignment to the Intermediary to all of the other parties to the purchase agreement. Remember, in old common law, an assignment was never considered effective unless all of the parties to that agreement were given notice.

Why Would the IRS Adopt an Old Common Law Assignment Rule

And so, the Treasury regulations sort of adopted this old rule. And, I think that is perhaps so that unscrupulous folks cant fabricate an exchange. They cant say “You know that deal that we did back last year? That was a 1031 exchange. The way to catch them in that lie would be to say, œWell, show us where you gave written notice to the other parties of the purchase agreement. If they cant show, well then maybe it wasnt a 1031 from the outset.

Taking a brief rest from talking about Real Estate… (Well, not really…)  Take a look at the video below.  The CEO of Nvidia, a computer graphics chip maker, is talking about what spaces his company will play in over the coming years. A large part of his conversation with the interviewer is covering mobile computing. Read the rest of this entry »

(Listen Here 3:13 min)

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.

Who is Really the Owner of the Property

When a Contract for Deed is given, the purchaser or vendee is considered to be the equitable owner of the property. They probably bear the risk of loss if the property is destroyed. They probably bear the burden of paying the property taxes to the local property tax assessor. And, under the contract, they probably enjoy the possession, the exclusive use of the property. So, for Federal Tax Purposes, the Contract for Deed vendee probably acquired the property way back when the initial Contract for Deed was entered into. Now, when this windfall is coming in, we are not really selling the property anymore, we are just receiving payoff like any other lender who has loaned money to a purchaser.

Section 1031 Does Not Apply to "Evidence of Indebtedness"

When a Contract for Deed vendor holds that legal title, they don't necessarily own the property anymore. They really own an enforcement mechanism. In the event of a default under the Contract for Deed, they can swoop in and cancel the Contract for Deed. This is an enforcement mechanism much like a mortgagee's interest or bank's interest in a mortgaged property. They are really a creditor, not so much a property owner for Federal Tax Purposes.