1031 exchange when seller financing is provided

[Miguel Jauregui]

This goes out to the CPAs/accountants...if I'm selling a property that will realize capital gains, and I decide to provide seller financing, does the IRS recognize the sale for purposes of the 1031 timeline starting at the point that the funds are actually received? Take for example that I sell a property for $10M, receive $2M down payment at closing, provide a X% interest-only loan with a balloon payment 24 months later. Does that mean that to take advantage of a 1031, I would have to identify $2M worth of real estate 45 days after closing, and then won't have to identify the $8M portion until 45 days after the balloon payment is received (let's say 24 month later)? Thanks in advance for the help/clarity!

[Bill Exeter]

Hi @Miguel Jauregui, 

There are essentially three (3) ways to address a seller carry back note: 

1. You would act as the lender and advance the funds out of your own pocket (in this case $8.0 million). This is the preferred method, but requires a lot of capital in order to accomplish it, especially in your example. 
   
2. You can sell the note to anyone that is willing to buy it out of your 1031 Exchange account, but they will generally want a pretty significant discount.  You can run the note past @Dawn Rickabaugh to get an idea of what the market would bear before you finalize the transaction. 
3. You can use the note as part of the consideration paid for your replacement property, but most sellers will not accept a third-party note.  It is possible, and we have clients that do it, but it is challenging.