My Client Would Like to do a 1031 Exchange, But He Needs to Sell His Commercial Note First . . .
A few days ago I was talking to an agent that was trying to put a commercial real estate transaction together . . .
His client owned a nice free and clear 9,000 sqft commercial property on historic Camino Real Road in Northern California. A couple of years ago, the property would have fetched close to $3 mil. Now it was listed at $1.6 mil, and there was one lone buyer who wanted it, only he couldn’t get traditional financing.
He needed owner financing.
He would pay the $1.6 mil if the seller would take $400K down and carry the rest at 6.5% over 30 years.
Well, because the seller doesn’t want to pay ANY capital gains, his agent was trying to see if we could create and then sell the note so the seller could put all the money towards a 1031 exchange, deferring all of his capital gains and depreciation recapture.
Good idea, except for this…
The discount on a ‘green’ commercial note (even with a good down payment and good buyer credit score) would be so high that it just would make sense (especially with that low interest rate!).
At the very best, he might get $800K for that $1.2 mil note, so it didn’t really make sense.
Here are the seller’s options:
- Just carry the note and defer most of the capital gains through the installment sale IRC 453. You’re getting your price, for heaven’s sake! And after some seasoning, you can sell the note for a smaller discount!
- Drop the purchase price and hope for a cash buyer, or one who can actually get a loan, so you can do a 1031 Exchange or Deferred Sales Trust to defer most, if not all, of your capital gains
- Lease the property out and be prepared to wait 10-15 years before you can sell at $1.6 mil, or better.
Owner financing is a great way to put real estate transactions together in today’s market. We just have to know what matters most to the seller, and what the buyer is able and willing to do.
Be sure to sign up for: Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits. Defer capital gains & sell fast for top dollar, regardless of market conditions (and have a note that’s worth something!)