Yes! Realty Exchangers, Inc., regularly manages these types of transactions and knows the correct procedure that must be followed to assure §1031 Exchange treatment. The installment note and related documents are made out in the name of the QI (Qualified Intermediary). There are four choices on how to use it to buy replacement property:
- You can use it to acquire Replacement Property by trading it to the “Seller ” for part of the consideration for purchase of new property. This does not trigger the unrecognized gain in the installment note.
- You can instruct the QI to sell the note on the open market (you can negotiate this sale or have the QI do it as your agent) and add the amount realized to the exchange proceeds. This will give you all cash to negotiate your replacement purchase. It’s less desirable because of the discount you might have to give on the sale of the note. This does not trigger the unrecognized gain in the installment note.
- A party related to you, the exchanger, such as a closely held corporation or relative can either purchase the installment note from your QI or provide financing so that your QI receives all cash at closing. You should consult with your tax advisor regarding structuring this type of transaction. This does not trigger the unrecognized gain in the installment note.
- You can wait until the end of the exchange and receive the installment note back from the QI. This will result in the note becoming “boot” and it will be taxable. However, at this point the installment sale rules under §453 kick in and you are permitted by election to use the installment method of tax accounting and only recognize capital gain as you collect principal payments each year. Interest on the installment note is always taxable at ordinary income rates. Your installment sale percentage for figuring gain will be 100%.