Sell your carry back note and get cash now. This type of financing can also be a very effective income tax planning and/or estate tax planning strategy for you if you do not want to 1031 Exchange into other like-kind replacement properties Seller Carry Back Note — Inside or Outside the 1031 ExchangeSpecial planning is required when you intend to complete a 1031 exchange and carry-back an installment note as part of the 1031 exchange transaction The common misconception is that seller carry-back financing and 1031 exchanges can not be used together and are mutually exclusive This could not be further from the truth Seller carry-back financing and 1031 exchanges are often combined in the same transaction They do, however, require careful advanced planning and structuring to ensure a smooth 1031 exchange transaction You must decide prior to the close of your relinquished property sale transaction whether your capital gain income tax consequences related to the seller carry-back note will be deferred under the installment sale rules pursuant to Section 453 of the Internal Revenue Code or will be deferred via a 1031 exchange pursuant to Section 1031 of the Internal Revenue Code The installment note and deed of trust or mortgage will be drafted differently depending on which strategy you select Once the relinquished property sale transaction has closed you can not change your mind, so it is important to meet with your advisors ahead of time to ensure that you make the correct decision for you prior to the close Excluding the Note from the 1031 Exchange — Installment Sale TreatmentShould you decide to exclude the seller carry-back note from your 1031 exchange transaction, the promissory note and the corresponding deed of trust or mortgage would be drafted with you listed as the beneficiary or owner of the promissory note Your Qualified Intermediary would only be assigned into the balance of the relinquished property sale transaction that is separate from the seller carry-back note portion of the transaction The cash portion or net proceeds from the sale transaction would be sent to your Qualified Intermediary at the close of your relinquished property sale transaction and the installment note would be owned and held directly by you and would not be part of your 1031 exchange The installment note and corresponding deed of trust or mortgage would be taxable under the installment sale rules pursuant to Section 453 of the Internal Revenue Code Your capital gain income tax liabilities are deferred over the term of the installment note and would be recognized and taxed as principal payments from the installment note are received by you It is extremely important to note that your depreciation recapture income tax liabilities are not deferred over the term of the installment note, but are actually recognized and taxed in the year in which the relinquished property sale transaction closes This can create liquidity issues for you during tax time, so be sure to plan accordingly Not including the seller carry-back note within your 1031 exchange transaction can be a great exit strategy when you want to get out of real estate altogether but still want to defer your income tax consequences over the term of the installment note It is extremely important to remember that that your depreciation recapture income tax liability is immediately recognized and taxed in the year of the sale and your capital gain income tax liability is only deferred over the term of the installment note The entire income tax liability would be immediately recognized when the entire outstanding principal balance of the installment note is paid off and received by you This can be problematic should the borrower decide to pay off the promissory note early You may want to discuss including a prepayment penalty in the promissory note with your advisors You may want to consider including the seller carry-back note inside of your 1031 exchange transaction so that the capital gain and depreciation recapture income tax liabilities can still be indefinitely deferred through your 1031 exchange Including the Note as Part of the 1031 Exchange — 1031 Exchange TreatmentOn the other hand, should you decide to include the seller carry-back installment note as part of your 1031 exchange transaction, the installment note and corresponding deed of trust or mortgage would be drafted with your Qualified Intermediary listed as the beneficiary or owner under the installment note and corresponding deed of trust or mortgage Learn how to properly draft the installment note and deed of trust or mortgage for your 1031 exchange transaction on our web page entitled "Legal Beneficiary Vesting for Seller Carry Back Notes included with in a 1031 Exchange Your Qualified Intermediary would also be assigned into your entire position in the relinquished property sale transaction so that at the close of the transaction your Qualified Intermediary will receive your entire cash position or net proceeds of your 1031 exchange as well as the seller carry-back installment note The note and corresponding deed of trust or mortgage under this structure would be tax-deferred under the 1031 exchange rules pursuant to Section 1031 of the Internal Revenue Code Your capital gain and depreciation recapture income tax liabilities will be indefinitely deferred as long as you continue to exchange ("swap until you drop") However, you will find that including a seller carry-back installment note in your 1031 exchange transaction is much more complicated than structuring the transaction as an all cash 1031 exchange transaction Including the Note as Part of a Reverse 1031 ExchangeAlthough reverse 1031 exchanges are even more complicated and involved, seller carry-back notes may also be utilized within a reverse 1031 exchange structure depending on your circumstances You need to review the proposed transaction with your advisors carefully to determine if a seller carry-back installment note would be of any benefit within your reverse 1031 exchange Complications with Including the Installment Note in the 1031 ExchangeStructuring and closing the relinquished property sale transaction with the seller carry-back installment note included as part of your 1031 exchange is the easy part It gets more complicated from here on out because your Qualified Intermediary is holding more than just cash in your 1031 exchange account How does your Qualified Intermediary use the seller carry-back installment note to acquire your like-kind replacement property There are really three (3) potential solutions: You can have the installment note endorsed and the corresponding deed of trust or mortgage assigned from your Qualified Intermediary to the seller of the like-kind replacement property as part of the consideration for the purchase of your like-kind replacement property This solution, however, assumes that a seller would be willing to accept the third-party installment note as full or partial consideration for your like-kind replacement property It is a possible solution, but not usually a very practical solution You can convert the installment note into cash by selling it to a third party Investor This could be a viable option, but in most cases the installment sale would have to be sold at a significant discount and would not be a practical solution either You could contribute additional personal funds equal to the face value of the installment note into your own 1031 exchange account (boot paid or contributed) so that sufficient cash funds now exist to complete the acquisition of your like-kind replacement property The note and deed of trust or mortgage would then be endorsed/assigned to you (boot received) after your 1031 exchange transaction has been completed This structure is probably the most practical provided you have the necessary liquidity to fund the strategy It results in the boot received being offset by the boot paid and therefore not generating any income tax consequences Including or excluding the seller carry-back installment note within your 1031 exchange is not an easy business decision In most cases the inclusion of a seller carry-back note with a 1031 exchange will work if there is sufficient pre-exchange planning to ensure the availability of the proper liquidity to fund the transaction And, the inclusion of the installment note usually makes sense from an income tax perspective However, you should decide whether you would even want to accept a seller carry-back installment note as part of your 1031 exchange transaction, or avoid the headaches involved with a seller carry-back installment note and insist on an all cash transaction for the purchase of your relinquished property You should always consult with your legal and tax advisors as well as your Qualified Intermediary prior to completing a seller carry-back installment sale as part of your 1031 exchange transaction Depreciation Recapture Income Tax IssuesThe inclusion of the seller carry-back installment note inside your 1031 exchange transaction will defer the recognition of your depreciation recapture and capital gain income tax liabilities Excluding the seller carry-back installment note from your 1031 exchange transaction will result in the immediate recognition of your depreciation recapture income tax liabilities in the year in which the sale of the relinquished property closed, and your capital gain income tax liabilities will be deferred and recognized over the term of the seller carry-back installment note Special Consideration for Installment Sale Notes In Excess of $5 Million There are special income tax provisions that you will need to take into consideration when the initial principal amount of the seller carry-back installment note exceeds $5 million Your capital gain income tax liabilities are deferred over the term of the installment note and recognized (paid) on a pro-rata basis as principal payments are made against the installment note However, if the original principal balance of the seller carry-back installment note exceeds $5 million, you can only defer the recognition of the capital gain income tax liabilities on the first $5 million The remaining capital gain income tax liabilities related to the balance of the installment note that exceed $5 million will be recognized in the year in which the sale of the relinquished property transaction closed Although this portion of the capital gain income tax liability will be recognized immediately, the IRS will allow you to defer the actual payment of the income tax liabilities over the term of the note and will assess interest on the deferred income tax liability Other Income Tax Considerations Interest income earned on your seller carry-back installment note is taxable as ordinary income, and is taxable to you in the year in which the interest income is paid to the holder of the note whether the installment note is included or excluded as part of your 1031 exchange The holder of the note is generally responsible for filing IRS Form 1098 that will report the amount of interest paid by the borrower to the IRS The servicing agent or collection agent is generally responsible for filing IRS Form 1099INT that will report the amount of interest income received by you as the lender under the seller carry-back installment note Location: Metro Westit's NOT ok to contact this poster with services or other commercial interestsPostingID: 792159253 other contact info, craigslist can notify them via email Location: Northwest/Merrimackit's NOT ok to contact this poster with services or other commercial interestsLicense info: UnlicensedPostingID: 792771333 I guess you can always say the dog ate it, or a tornado snatched it into the sky when you were in Nebraska visiting Aunt Dorothy and Uncle Toto, but the truth is, you may not be able to sell your note if you can’t produce the original The original note is the “green stuff,” it’s the currency, it’s “the thing you’re selling The original John Henry (signature) of the Buyer/Payor, even if it’s not very attractive, fluid or sophisticated, is the silver lining in your paper And it kind of makes sense, doesn’t it Would you be able to pay your mortgage by sending in a nice copy of your check to Bank of America they’re used to losses these days and probably wouldn’t notice) If I’m buying your note, I want to be the legal holder of the note, so I need:the original note in my possessionthe note properly endorsed to me (”For value received, Pay to the Order of Dawn Rickabaugh, with recourse” and it must be signed and dated by the Note Seller) If the original note is in my possession, and is properly endorsed to me, then I am a holder-in-due-course, which gives me some substantial protection should any legal issues arise Right now I am working with a probate attorney in Los Angeles who is liquidating an estate holding a $500,000 seller carry back note, secured by a commercial property in Redondo Beach I was able to offer the estate more than the Payor on the note was offering When I last spoke with the attorney, he said all the beneficiaries/heirs were scrambling to find the original note Perhaps the escrow company still has it in their file, but they really need to find it, or things get a lot more complicated Do yourself a favor, when you carry back paper: keep the original note, deed of trust, Buyer’s credit application (1003) and credit report all together in a very safe place And keep a very good payment history to be able to prove that you have a performing asset Why not sign up to receive future posts by email Leave a comment or ask a question You can follow any responses to this entry through the RSS 2 You can leave a response, or trackback from your own site There are insured safekeeping companies who will hold the documents for the note owner… Pretty cool, cuz note ownership can change hands while the note can stays in the same place “Real” mortgages, funded and then sold by financial institutions, have to be “certified” by the safekeeping company… Somebody goes to jail or writes a big check if they lie about what’s in the vault It makes sense and I’d never thought of that for private note holders To be a holder-in-due-course, I need to have possession of the note If I don’t have physical possession, I wonder if I am jeopardized in any way I heard of one situation where the “possession” was challenged because the note servicer had the original note, not the note holder Doesn’t make sense, though, because if I put it in a safe deposit box, someone could argue that the bank had possession, not me, which is ridiculous As the Seller Finance Evangelist for the largest 3rd party long-term escrow servicer in the US maybe I can shed some light on this question The “challenge” you mentioned was probably the only way the attorney involved could justify their fees Thank you so much for your insight and information One of the great things about blogging is that you often have the opportunity to attract people who know a lot more than you do, just by starting a conversation WebsiteXHTML: You can use these tags: --> Receive an email if someone else comments on this post These 10 spiritual principals were received by James M Allen in 1993 on top of Mt Originally created for the edification of private hard money lenders, the principles largely apply to any seller thinking of becoming the bank on their own property: ALWAYS take possession of the original note ALWAYS make sure that the deed of trust is recorded ALWAYS make sure that you have title insurance showing your deed of trust in the proper priority ALWAYS make sure that you record a “Request for Special Notice” with respect to all senior deeds of trust at the time you make the loan, and promptly when your address changes ALWAYS personally inspect the property which is security for your deed of trust Would you like to own this property in this neighborhood NEVER lend money on a deed of trust where you cannot afford to keep prior payments current while you foreclose your own deed of trust ALWAYS insist that the note and deed of trust show you as the original beneficiary on a new loan, not the broker who arranges the loan ALWAYS make sure that the note is assigned by separate assignment on the note or permanently attached to the note, and by recorded Assignment of the deed of trust when you are buying a “seasoned” note ALWAYS keep your original notes and deeds of trust in safe deposit boxes, or in similarly secure environments You can keep copies in your files for working reference ALWAYS make sure the property taxes are paid current, that prior deeds of trust are kept current, and that hazard insurance is adequate, in force, and premiums are paid current My friend, I testify that if you will heed these principles, and your attitude improves greatly, you will one day enter Seller Financing Heaven You should practice safe recourse, or at least be aware of the risks if you don’t When I buy a note, I need to have the note properly endorsed to me, very much like a check is endorsed from one person to another: “For value received, pay to the order of Little Johnny Cakes,” signed and dated by the note seller This is written on the back of the note, or on a separate piece of paper that is then permanently attached to the note (an allonge) But there’s another aspect to the endorsement After identifying the new owner of the note, it should say “with recourse” or “without recourse For value received, pay to the order of Dawn Rickabaugh, with recourse If the endorsement includes the words “with recourse,” it means that the note seller is guaranteeing the note If the Payor doesn’t make the payments, the note seller is agreeing to make the payments to the keep the note buyer whole If I’m the note buyer, then I would want the seller to agree to a recourse loan that adds another layer of protection for me If a seller is willing to endorse “with recourse” it probably means he is expecting the note payments to keep coming in, and is not hiding some known problem with the note A note sold “without recourse” means that the note seller doesn’t have to be on the hook for the money if the payments stop coming in If I’m the note seller, I would probably want to sign “without recourse ” I don’t want to take a big discount and then have to guarantee the note payments as well It’s a point of negotiation between buyer and seller The silent endorsement: if nothing is mentioned about recourse either way, guess what Sellers are often unaware of this, so it can become a point of contention if the note buyer all of a sudden starts demanding payments 2 years down the road when a problem arises It’s just better to discuss it and establish it clearly within the endorsement on the back of the note As always, it’s best to consult with an attorney to understand the complexities and variations in your state I want to carry paper, please help me create a valuable noteWhat will you pay for my note The Exeter Learning Institute: Seller Carry Back Note Combined with a 1031 Exchangeskip to main | skip to sidebarThe Exeter Learning InstituteThe Exeter Learning Institute is dedicated to educating and informing real estate investors on the benefits of 1031 tax-deferred exchanges (866) 393-8377Friday, November 23, 2007Seller Carry Back Note Combined with a 1031 ExchangeYou may be requested by real estate buyers from time-to-time to assist them in the acquisition of your real property ("relinquished property") by helping them with the financing "Seller carry back promissory notes can be very powerful sales tools when negotiating and structuring real estate transactions, especially in rising interest rate environments, distressed real estate markets and tight credit markets However, seller carry back financing can complicate a 1031 exchange transaction if you are planning on selling investment property and then 1031 exchanging into other like-kind replacement property You can learn more about this strategy and the related complications at http://www Exeter 1031 Exchange Services, LLC launched The 1031 Exchange Institute to assist investors in making better informed investment decisions You can contact the Exeter 1031 Exchange Services, LLC's office closest to you by calling (866) 393-8377 Exeter is president and chief executive officer of Exeter 1031 Exchange Services, LLC and its affiliate companies He has written and lectured extensively on 1031 exchange transactions pursuant to Section 1031 of the Internal Revenue Code and on Tenant-In-Common (TIC) Investment Properties as like-kind replacement property solutions pursuant to IRS Revenue Procedure 2002-22 Exeter also serves as an industry consultant through Exeter Consulting Group, LLC and has served as an expert witness regarding 1031 exchange related litigation The Exeter Learning Institute: Sample Legal Beneficiary Vesting for Seller Carry Back Notesskip to main | skip to sidebarThe Exeter Learning InstituteThe Exeter Learning Institute is dedicated to educating and informing real estate investors on the benefits of 1031 tax-deferred exchanges (866) 393-8377Friday, November 23, 2007Sample Legal Beneficiary Vesting for Seller Carry Back NotesWhen you sell real estate or personal property that will be part of a 1031 exchange and you carry back an installment note (seller carry back financing) to facilitate the sale of the asset, the installment note must also be included as part of the 1031 exchange account held by your Qualified Intermediary in order to defer all of your income tax liabilities In other words, the note must be owned by and held by your Qualified Intermediary You can learn more by reading our web page entitled "Seller Carry-Back Financing Combined with a 1031 Exchange "The procedure to include the seller carry-back installment note as part of your 1031 exchange account is actually very easy The installment note and the corresponding deed of trust or mortgage documents would be drafted with the Qualified Intermediary listed as the beneficiary or owner The installment note and corresponding documents cannot be drafted with your name listed as the beneficiary or owner The documents must be drafted in the name of the Qualified Intermediary so that the Qualified Intermediary owns the installment note as part of your 1031 exchange account Drafting the note in your name will trigger "constructive receipt" of your 1031 exchanges funds or assets and create a taxable event Notes incorrectly drafted with your name as the beneficiary or owner cannot be corrected after the close of the transaction and generally will be treated as boot and taxed as an installment sale note under Section 453 of the Internal Revenue Code Click Here For More Information Hyperlink Text
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