1031 Exchange and Seller Financing

[Andy Hayes]

Hi BP!

I own a vacation rental property that I'm looking to sell to free up cash. I have an opportunity to buy another, more expensive property and the current owner of the property we'd like to purchase is offering seller financing.

My question: Could we use a 1031 exchange and buy the new property using seller financing? Are there any legal or tax implications we should be aware of?

Really appreciate your advice!

-Andy

[Dave Foster]

@Daniel Dietz, Great example.  There could actually be 3 possible outcomes 

1.  The seller could take that extra 100K as boot and pay tax on it but defer the tax on any remaining profit and depreciation recapture.

2. The seller could use all $300K in the down payment.  And then after the exchange. The seller could conceivably give them a second mortgage or a cash out refi and give them an additional 100K back.  I think they'd want to structure this carefully so it didn't appear that it was pre ordained.  And that it was actually a refinance after the fact.

3. They could use $200K down on the property with the owner carry.  And then use the remaining 100K to purchase another piece of real estate.  Either to be purchased with cash.  Or used as a down payment on something like a $400K purchase.  This way actually lets you easily multiply the power of the 1031 and take full advantage of the owner carry.