Posted by William L Exeter on April 24, 2005 at 12:25:44:
Yes, you can do this. I am a little concerned about the word “give” however, so here is the structure that can be used.
You would sell the property. The terms can include a seller carry back that could also be in the form of a wrap (all inclusive trust deed or mortgage - AITD). The beneficiary under the seller carry back, whether it is a wrap or not, would be the accommodator. This way, at the close of the transaction, the accommodator ends up holding the note and the cash. This is the easy part.
Now comes the tough part - you must somehow convert the note to cash in order to complete your 1031 exchange transaction. You essentially have three options to do this.
(1) You, as the taxpayer/exchangor, can contribute cash into the 1031 exchange in an amount equal to the value of the note and complete the 1031 exchange. The note would be assigned to you after the 1031 exchange has been completed.
(2) You can sell the note either at face value or at a discount (discounted note sales can be very expensive).
(3) In extremely rare cases, you can convince the seller of your replacement property to accept an endorsement of the note and an assignment of the deed of trust or mortgage as part of the consideration.
From my personal experience, a large number of 1031 exchange transactions structured like this fail because the investor does not have the “solution” lined up in advance, so make sure you have everything ready to go and then run the entire transaction past your accommodator.