Get Flash to see this player.

(Listen Here 2:53 min)

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.