Tax exchange question - Posted by Tim

Posted by Randy (SD) on March 01, 2006 at 12:20:06:

I’m not an expert on the 1031 exchange part of your question, as for the second part of your question “create a note” with your brother as the lender the answer is yes. To protect all parties be sure you use an escrow company to draw the documents and get a lender’s title policy.

Tax exchange question - Posted by Tim

Posted by Tim on March 01, 2006 at 11:43:51:

Let say I have an investment property that I bought then rented for 2 years. Bought 150k. Owe 150k. Worth 300k. Now I want to sell and do a tax exchange. I know that with a tax xchange, I can’t take any money out unless I refinance the property I’m to buy after purchasing it. However, can I simply draw up a deed of trust secured, against this property, with my brother being the “lender” so that escrow could pay him at closing? This way I won’t have to go through the costly process of refinancing my newly bought home.

Would this work?


Re: Tax exchange question - Posted by David Krulac

Posted by David Krulac on March 01, 2006 at 15:09:29:

there’s some problems your plan and you don’t need to do that.

  1. your brother would have to declare interest income. you say well its a zero interest loan. IRS says you must use “imputed interest”. gotcha.

  2. to prove that its not a sham your brother would have so show a cancelled check, where he gave you the $150,000 that the mortgage is for. He would be subject to IRS audit and it all the i weren’t dotted and ts crossed, he and you could be in big trouble.

  3. the reality is that you’re trying to do this convulted transaction with “related parties” (look that up in the IRS code) and you don’t really need to.

  4. property is worth $300,000, go to any bank, s&l mortgage lender and get a 80% LTV loan for $240,000.

  5. review the 1031 exchange requirements.

  6. the $60,000 remaining could be sued for selling cost of the relinquished property, buying costs of the acquired property, improvement to the acquired property.

  7. you are going to need an accomodator for the 1031 exchange anyway, pick an experienced, knowledgable and honest one and he/she can answer all you technical questions.