1031 Exchange For Notes - Loophole?
I had an interesting thought that I wanted to run by everyone. 1031 exchanges are used for "like kind investments." It's not always easy to find a property for a 1031 exchange and they don't always go through as you want them to. So I had this thought....
Set up "HML Corp" to act as your lender and "Rehab Corp" to do the work on a property.
-Rehab corp borrows money from HML corp for a rehab project or a flip.
HML corp charges a very high interst rate, points on the back end, and a -few penalties for prepayment.
-After the property is sold (lets say there's a 30K net profit) the HML corp is paid off (which is $29K of points, penalties, and interst) and Rehab corp makes $1k.
NOW for the 1031....
-on day 45 HML corp identifies 3 like kind investments, one of which is a loan to "rehab corp".
-The note is created for rehab corp and:
1. You have another property to rehab/flip and you do the same
OR
2. You lend the profits to the company for $50 per month, interst only.
In both cases you've effectivly defered the taxes by investing in a like-kind investment (a note), but it's opened up your time line indefinitly.
Could this work, or would it get shot down???
You might want to read Section 1031 of the Tax Code. There you will find that stocks, bonds, or notes, other securities or evidences of indebtedness or interest are specifically excluded from participating in the exchange.,
Thanks. As I had guessed, I wasn't the first one to think of something like that.