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A different real estate contract & it's problems

KyJoe

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Aug 28, 2007
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I have a couple of buildings for sale. I got an offer yesterday for substantially more than I am asking. The buyer wants to have 150k per building (300k total) credited back to his contractor. He included this amount on top of my price, so he is really just borrowing it, but rolling it into the loan. The sale price will reflect the higher amount. I don't see how his bank would do this, but if they do, my question is: Won't that higher price increase what I have to spend on a 1031, even though it's not what I recieve? If I just cash out of the deal, would it affect my taxes any differently than just a usual sale? Is there any other problems with doing this deal? Diane help! Anyone!
 

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tbsells

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Jul 27, 2007
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I have done a couple 1031 exchanges and learned enough to say BE VERY CAREFUL. This is a complex area of tax code where professional guidance is absolutely necessary. Do you have a qualified intermediary? If so, they should be able to answer this question. Hopefully Diane will respond. If not, I would not respond to the offer until consulting with a tax pro or qualified intermediary.
 

phlgirl

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Read Millionaire Fastlane
Aug 29, 2007
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Good morning -

I have also performed several 1031 exchanges and, unfortunately, Kurt, I think you might be wrong on this one. Logically, only having to invest the gains made sense to me as well; however, I found that you actually must replace the entire value of the sold property (based on sale price) or more. Otherwise, you will pay tax on the difference (i did this too).

Not sure if there is a way to have them deduct the credits back to the seller.

It is a fairly straight-forward process, once you get the rules down.

I have always worked with this company. They seem to be nationwide and work very well over the phone/via fax. They have some good information about the process on their site as well.

http://www.bayview1031.com
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
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I have a couple of buildings for sale. I got an offer yesterday for substantially more than I am asking. The buyer wants to have 150k per building (300k total) credited back to his contractor. He included this amount on top of my price, so he is really just borrowing it, but rolling it into the loan. The sale price will reflect the higher amount. I don't see how his bank would do this, but if they do, my question is: Won't that higher price increase what I have to spend on a 1031, even though it's not what I recieve? If I just cash out of the deal, would it affect my taxes any differently than just a usual sale? Is there any other problems with doing this deal? Diane help! Anyone!
You need to "roll" two things in a 1031 like-kind exchange:

(1) The sales price

(2) All cash proceeds

If you don't roll all of it, there will be gain attributable to the portion that isn't rolled.

So, in your example, if I'm reading it right - the buyer is grossing up the sales price to cover a loan for him. That means you are selling it for more. It could mean more profit (not quite clear what you're doing here) or it could mean a higher price and a higher cost because you're responsible for the repair. In other words, same profit, just higher sales price and higher basis.

In any case, the higher sales price means a higher amount that you need to 1031
 

SteveO

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The buyer needs to find a lender that will do this without changing the purchase price. There are plenty of lenders that will allow money for a rehab or repairs. The lender will hold the money and dish it out to the contractor as the repairs are completed.
 

SteveO

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Do you have a sales agent on this deal?
 
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KyJoe

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Aug 28, 2007
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Yes I have a very experienced top agent. There is another agent for the buyer, and I have a license which I have disclosed. The buyer is from San Fransisco & picked this area for what ever reason. The buyer is suposed to have a 800 credit score. He is putting 10% down on each of the properties, but then pulling out the 300k on top. There is no way that these properties will appraise in my opinion. It's clear in the contract what I get, and that I pay the commission on. I do have a 1031 lawyer that I have used numerous times, and will contact him. I gave myself 3 more days after the buyer's inspection is up to approve or trash the deal baised on my tax situation. From my other 1031 deals, I am sure that I will have to buy a property for the sold (recorded)price. If I just cash out, I am pretty sure that I would end up paying capital gains on the real gain, the 300k would show as an expense.
 

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