1031 Question - Not an easy one

[Nicholas Lovric]

Hey BP Friends, 

I’m looking to purchase a multifamily (56 unit) from sellers who acquired it with 1031 exchange proceeds. They want to seller finance it and aren’t sure if they would have to pay out all the deferred taxes all at once or over the period of the loan? Any insights would be greatly appreciated.

Cheers,

Nick 

[Bill Exeter]

Hi @Nicholas Lovric, 

The above post misunderstood your question.  I think your question is that the seller wants to sell with seller financing and does not want to do a 1031 Exchange and they are concerned about how the seller carry back note would be taxed.  

Seller carry back notes or installment sales are taxed under Section 453 of the Internal Revenue Code.  Generally, any cash received at closing would trigger depreciation recapture and/or capital gain taxes to the extent of the cash amount received.  The balance of the capital gain is generally deferred over the term of the seller carry back note.  

However, if the seller carry back note is greater than $5.0 million there are special considerations.  

It is very important that the seller consult with his or her CPA and have them run the numbers.  There are many factors that come into play that could change the answers above.