1031 Exchange and Seller Financing

[David Alder]

I'm selling an investment property as part of a 1031 exchange and am considering offering seller financing as current market rates seem to be prohibitive to many potential buyers. I would like to understand the tax implications of doing this. For it to work, and provide the necessary cash needed for a down payment of the replacement property, the buyer would need to bring at least a 35-40% down payment. My thought is that the cash down payment would go into the exchange and be tax deferred. I would not have enough other sources of cash to purchase the note from the exchange so would I be allowed to keep the note portion of the transaction out of the exchange and apply installment sale tax rules to that part of the transaction? In addition, I'd be doing a wraparound mortgage where I retain the original mortgage on the sold property. Am I still able to deduct interest payments from that mortgage on my taxes if I know longer have title to the property (I'm assuming for a 1031 to work title to the sold property has to pass to the buyer)? Sorry for the long post, but I feel like it's a fairly unique situation.