Land Development Today - July/August 2007 - (Page 12)

TAX STRATEGY What other technique can be implemented to avoid a reverse structure when the seller won’t postpone the acquisition date? If you have a purchaser for your relinquished property and the whole reason why you are thinking about a reverse is that your purchaser is unable to obtain timely financing, you can negotiate to provide your purchaser with seller-financing, via an installment contract, in an effort to accelerate the closing date. The installment arrangement allows the purchaser more time to obtain independent third-party financing since the taxpayer acts as a temporary lending source. In return, the purchaser provides the taxpayer with a promissory note, as consideration for the relinquished property, which is to be satisfied as of a designated maturity date. The satisfaction of the promissory note can be accomplished over a period of installment payments or in one lump sum amount. Meanwhile, the taxpayer protects itself by retaining title to the property. Whenever seller-financing is used to avoid a reverse, the transaction must be converted from one that would be tax deferred in accordance with IRC Section 453 (installment sales) to one which will be taxed deferred in accordance with IRC Section 1031. The conversion steps are three-fold: 1) the installment note must be made payable to the order of the QI – not the taxpayer, 2) the promissory note must be booked as an asset of the QI exchange account, and 3) the promissory note must be converted into cash before the replacement property’s acquisition date. How a taxpayer converts the note into cash can be done in various ways. The most commonly used conversion technique is to arrange for the taxpayer, in accordance with Private Letter Ruling 200241016, to enter into a Note Purchase Agreement which allows for the acquisition of the booked installment note, from the QI. After the replacement property is acquired using the note, purchase proceeds (plus any additional funds needed to satisfy the purchase price) and the exchange transaction is terminated, the QI endorses the installment note to the order of the taxpayer. Any payments that the purchaser is required to make, in accordance with the terms of the installment note, are now sent to the taxpayer tax free. A cost comparison of this technique with that of a reverse should be analyzed prior to forging ahead with either. SLDT About the author: Julianna A. Clementi-Ryan is the Vice President of Central U.S. Operations of Nationwide Exchange Services Corp. She can be reached at 312-803-7504 or by email jclementi@nationwide1031.com. Circle 161 • or www.LandDevelopmentToday.com/adinfo 12 July/August 2007 Sustainable Land Development Today http://www.concretewashout.com http://www.concretewashout.com http://www.LandDevelopmentToday.com/adinfo

Table of Contents Feed for the Digital Edition of Land Development Today - July/August 2007

Cover Contents Our Voice: Industry Advocates Your Voice: Reader Response Cover Story: Preparing Your Tax Strategy The Rules of the Game Historical Redevelopment Project Profile: Seattle’s High Point Retention: From Ravine to Road Land Use: Picatinny Arsenal Mixed Use: Florida Offices Industry News Products/Services Showcase Classifieds Recommended Reading Advertiser Index Editorial Board The Last Word: What? Me Plan… Urban Development

Land Development Today - July/August 2007

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