1031 Exchange with Seller Financing

[Francesca Tran]

Hello, 

I am currently looking at a SFR where the seller wants to do a 1031 exchange into another more expensive investment property. I would like to do a seller financing option. Is it possible to combine these two strategies and how can I make this work?

[Dave Foster]

@Francesca Tran, If the seller has alternate sources of cash he can simply sell to you on an installment sale and start his 1031 exchange.  The note and your down payment both go into the exchange.  During the exchange period he taps his alternate sources of cash and replaces the note from his exchange account.  Now he has enough cash to purchase his replacement property.  

It really doesn't effect you at all.  For instance, the seller is selling for $100K.  You have $20K down and he carries a note from you for $80K.  During the exchange process he replaces the $80K note with $80K in cash and the note moves outside the exchange.  He still owns the note but it is now tax free except for the interest part of the payments.  And he has enough cash to complete his exchange and fully defer all tax.

It's a very elegant solution in the right circumstances.