Selling a rental to current tenants with seller financing

[Susan Grinde]

Really quick scenario...

I have a home we purchased in 2009 for $123K cash, rehabbed it and have been renting since 2010 for $600/mo cash flow. Seller's market in Wenatchee, WA and can list to sell at $250K. My current tenants want to buy it, but can only qualify for $180K. Can I work a deal where they get a loan for $180K and we do some sort of personal financing between us that they pay back the difference of $170K (so we continue to cash flow about $500/mo)? If so, would we only pay capital gains on the $57K ($180K-$123K)? Actually, we would probably put into 1031 since we can buy two houses out of state for $185K. Thanks for any insights!