Seller Financed 1031 Exchanges

The Problem with Seller Financing in a 1031 Exchange

If you carry back a note on the sale of your relinquished property, the face value of the note is treated as cash boot and is taxable in the year of the exchange. This can significantly reduce your tax deferral if not properly structured.

The Installment Sale Strategy

One strategy is to combine a 1031 exchange with an installment sale. You can exchange the portion of the proceeds that are reinvested into the replacement property and report the note payments as installment sale income as they are received. This spreads the tax liability over the term of the note.

• Exchange the cash proceeds into the replacement property
• Report note payments as installment income when received
• Spreads tax liability over the note term
• Requires careful coordination with your CPA

The Seller Financed Exchange Trust

Another strategy involves placing the note into a special trust that qualifies as like-kind property. This is a more complex arrangement that requires careful structuring, but it can allow you to defer the tax on the note as well as the cash proceeds.