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Can I finance the sale of my relinquished property?
Including a seller carry-back note as part of your tax-deferred exchange is actually very easy. In order for it to be included in the exchange, the installment note and corresponding documents need to be drafted with the Qualified Intermediary listed as the beneficiary or owner (example language: “ERG as QI for John Doe”). The note and corresponding documents will then be sent to the Qualified Intermediary and held until the buy out.
How do I reinvest the funds if they are in the form of a note?
Before the purchase of the replacement property, the exchanger will need buy the note out of the exchange account. This will leave cash in the exchange account to be reinvested and the exchanger being able to directly receive the payments on the note.
The exchanger will send funds in the amount of the note plus any payments that have been made, and then the note will be assigned back to the exchanger. This can be done in whole or in a partial payment, but keep in mind if you only purchase part, you will owe tax on the remainder of the note. This “buy back” of the note must take place before you close on your replacement property purchase.
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