1031 Exchange with Seller Financing as Boot

[David Alder]

I entered into a partial 1031 exchange in 2023. Sold a rental with ~$260K adjusted basis for $615K. Received cash of $480K which went directly to QI and accepted seller financing for the remainder $135K (note did not go to QI). Purchased replacement property for $1M using the full $480K cash to cover down payment and closing costs. My understanding is that the $480K qualifies for 1031 treatment and tax deferral. While the $135K note qualifies for section 453 installment sale treatment with the gain spread out during the payment period. 1) Is my understanding of this transaction correct? 2) How would I record this transaction on form 8824 and form 6252 (assuming those are the correct form to fill out)?

Thanks

[Dave Foster]

@Bill B. I appreciate that shout out.  You are right.  If @David Alder, had the ability he could have avoided tax entirely by having the note go into the exchange account.  and then swapped it out for cash.  Then he could have done a full 1031 exchange.  And the note would have been outside the exchange with no tax liability other than the interest allocation.

David, the 8824 has to reflect that note as boot taken.  That recognizes the gain.  And then the 6252 reports the installment sale treatment of the boot.  You'll probably need to arm wrestle them so they don't count the boot as depreciation recapture which you'd have to repay this year.