Seller finance and 1031

[Marina Wong]

I am offering seller finance on an investment property (with balloon payment for a short period of time) because of the current high mortgage rate, since I cannot subsequently 1031 the balloon payment when I receive them in 3-5 years, any tax defer strategy that I can use in this situation? TIA

[Lauren Speidel]

@Marina Wong Seller carry back notes can be a great option for a buyer in this environment. For a seller looking to do a 1031, it can cause some headaches, but we are seeing them more and more. One option is that you have the note drafted to you and at closing you bring the value of the note to the closing so that the QI (Qualified Intermediary) holds all of your Exchange proceeds. As the buyer makes payments to you, the principal is not taxed but the interest is. Another option is that you only do an Exchange with the down payment and treat the seller carry back note as an installment sale. I would check with your tax advisor to see if this financially makes sense. We also have seen some Exchangers, have the note drafted to the QI and the seller somehow funds the value of the note prior to purchasing the replacement property, you also can sell the note to a third party to make up for the note amount, but I would expect it to be at a significant discount or the seller of your replacement takes the note as part payment for their property. While this last option is feasible, I've never seen it done. I hope this helps.

[Marina Wong]

Thank you @Lauren Speidel for such detailed explanation.