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Seller carry back financing within a 1031 exchange: How does it work? 🤔

With the ever increasing interest rates on loans, Buyers are losing more and more financial power and buying capabilities. However, there are some creative ways you can maneuver, keeping the deal together AND satisfying your 1031 exchange.

I should preface this by saying that as a Seller and/or Exchanger, you should carefully consider these options before signing any contract with your Buyer. Reviewing your options with your financial or legal advisor is strongly suggested and encouraged.

Now, onto the hood stuff 👇🏻

If you decide to create a Promissory Note with the Buyer, basically an IOU, you have options. But, because it’s an IOU, and not actual cash, you will receive less cash at the closing. This reduced amount could effect your purchasing power towards your replacement property.

In other words, buying a replacement property that is equal or greater than what you sold, with less cash received at closing means you need to bring in your own funds to the closing or take on a larger loan in order to offset that difference.

It’s a major factor that needs to be considered. 👍🏻

If that seems a bit complicated then consider loaning them the funds instead of an IOU.

IF you have the money 💴 to cover the Buyers financial deficit, then you can give them the cash, in the form of a loan, and act as their private lender. Maybe the Buyer can only borrow so much to afford a loan with a large financial institution at 8%. You can loan them the the deficit that makes up the difference between their initial deposit, 1st loan and purchase price. You can become the 2nd lender.

Not only are you receiving all the funds at close, instead of an IOU, but the loan doesn’t effect your 1031 exchange timelines. It’s an incredible option IF you can afford to utilize it.

If you want to learn more about these options in detail, DM us the word OPTIONS and we’ll send you the article link.

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1031 exchanges 🪜simplified:

If you are a real estate investor and are looking to build wealth AND defer 💯 capital gains tax you need to look into and understand 1031 exchanges.

This is the only tool that forces you to buy UP ⬆️

📌The first investment property you buy is the lowest rung of your investment ladder.

➡️ Let’s say you bought a condo for $200k and rented it out for several years. The condo has appreciated in value and is now worth $400k.

If you sold the condo outright, you’d pay tax on the gain, so on $200k. BUT, if you decided to do a 1031 exchange, you can buy another property (maybe a house) that is worth at least $400k, which becomes the 2nd rung of your ladder 🪜.

Every time you continue to exchange one property for another, you add a rung onto your ladder 🪜.

☝️ important point to note is when you choose to sell your investment property and NOT do a 1031 exchange. The taxes owed is not due on the gain from the ladder rung right below….it’s due on the gain from highest rung to the first and lowest rung!

This is where the phrase “swap-til-you-drop” was coined. You can keep exchanging property for property until your death with zero limits to how many times you complete a 1031 exchange.

One way to help mitigate this is instead of continually buying up ⬆️ start buying out. This means instead of buying one property in your 1031 exchange, split the value among 2 or more properties…adding additional ladders to your portfolio. More ladders, fewer rungs.

Now, you have multiple properties that are appreciating in value, offering multiple sources of income and hopefully increasing your cash flow.

Like I’ve said MANY times…1031 exchanges are an incredible tax saving, wealth building tool!

Follow for all things 1031 exchange related

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