1031 exchange-seller financing

[Brian Rank]

 I am selling my commercial building and am financing the sale. The bldg. is paid for.

There will be a down payment and monthly payments but the profit won't be realized for years. Is there a way to avoid the tax liability with a 1031 exchange with it's time constraints?  Thank you 

[Dave Foster]

@Brian Rank,  There are a couple of ways to incorporate a 1031 into this scenario. When you close the sale all proceeds (including cash down payment and note) have to go into your exchange acct.  The note is made payable to your QI as your intermediary so that you do not have constructive receipt.  This also means that payments go to your exchange acct. as well.  Once this is done you now have cash and a note that you can use to purchase your next property.

1.  You can offer the note to your next buyer but offering an unseasoned note at close to par value is usually a non-starter for a seller.

2.  If you have any cash resources (savings, loans, relatives - anything), you can access cash outside your exchange acct and "buy" the note from your exchange acct. Now your exchange acct. has only cash (the down payment and the face value of the note which you just put in).  You may use the cash in your exchange acct to complete your purchase and the entire sale will be tax deferred under 1031. 

Meanwhile the intermediary assigns the note to you so outside your exchange acct. you now "own" a note that you paid par value for so there is no profit to be taxed on the principle portion.  The only tax paid will be due from interest.

It's a brilliant strategy if you can round up the cash.  And the other thing you can do is to refinance your replacement property after the fact to access new cash to replace wherever you got the cash to buy the note from in the first place.