1031 exchange and seller financing 20% down payment.

[John Bradshaw]

Doing a like kind exchange and seller financing 20% down payment for buyer

My question is- as the buyer pays the 20% back will there be capital gains tax on that? Is there a way around it?

Thanks!

[Dave Foster]

@John Bradshaw,  If you're doing a 1031 exchange then that 20% will not go to you.  It will go to your qualified intermediary for the 1031.  So tax on it will be deferred.  If you're just doing owner financing then you will pay all of the tax.  And the $20K down payment will be allocated between principle and profit.  Every month also the monthly payment will consist of a payment that is part principle (not taxable), part profit (probably capital gain) and part interest (ordinary income tax).  

The trick is you want to get full tax deferral is to do the 1031 exchange.  But when you do that you have to have a way to deal with the note.  Since all proceeds from the sale have to go to your QI and be used in the 1031 purchase including both the down payment and the note (or cash that is the value of the note).