1031 Deferral
In a 1031 exchange period involving multiple closings, how can you deal with excess funds? Does closing on a property preclude you from using the surplus funds to buy down that closed property's note, by the end of the 180 day period. Anyone have experience with this?
Thanks.
There are not enough facts here to answer the question. Are the multiple properties set-up in separate 1031 exchange accounts or are they all included in one 1031 exchange account. Hopefully they were all set-up in separate 1031 exchange accounts so that you will have more flexibility in your 45 and 180 day periods and in indentifying properties.
Once you have closed on a replacement property you can not use excess funds still held in your 1031 exchange account to paydown the note. The paydown of a note is not a real property interest and therefore not "like-kind" property.
[addsig]
Thanks Bill. I suspected that. The only other solution is to use the excess and increase the price of the final leg in the exchange, but that would transfer the tax liability to the seller. If the seller were to make some improvement or repair to the property, prior to closing, that would solve the problem. I believe the price can increase to the extent that it doesn't exceed the 200% rule. Am I fishing?
The seller can always increase the price to satisfy your replacement property needs in your 1031 exchange, but it will create issues for the seller. However, there are ways of dealing with that, so have the seller speak with his or her tax advisor.
The 200% rule only applies if you need to identify more than 3 properties as part of your 1031 exchange transaction. If you identify up to but not more than 3 properties, then you will fall under the 3 property rule and the market value of the replacement properties does not matter. If you identify more than 3 properties then the total fair market values of the properties identified can not exceed the 200% limitation (200% of the total sales price of your relinquished property).
Does that answer your question?
[addsig]
I am under the 200% guideline by virtue of more than 3 properties. The seller can only be guided by his tax advisor, but unfortunately, the incentive isn't there.
Thanks.