Owner Carry and tax advantages

[Luke McFetridge]

I found a small commercial building where the owner is wlling to sell and carry the note back on the building.  Seems advantageous for me so I can avoid bank hassle and small out of pocket.  

Questions:

1. What pitfalls might this strategy have?

2. Can it be structured to defer taxes for the seller and avoid an immediate 1031

3. Can I deduct the interest if it is a seller carry?

Thanks!

[Dave Foster]

@Luke McFetridge, Want to clear up something here.  Taxes in an installment sale are not reduced.  If your seller sells to you on installment they recognize the full gain and pay the full tax - but it is spread over time and only as payments come in.  This is the favorable treatment that @Casey Mericle is talking about.

However, if your seller is wanting to actually defer taxes indefinitely then a 1031 exchange is the way to go.  But there is no reason why they could not combine an installment sale to you and a 1031 at the same time if the right set of circumstances line up.  We do few of these a year.

If the seller has access to cash from another source - equities, cash, a friend, a retirement acct they can borrow from, etc then they could sell to you on a note and start a 1031 exchange.  Instead of cash going into their exchange acct the note goes in.  At some point during the exchange the seller replaces the note with an equal amount of cash and uses that cash to complete their exchange. Now the note is outside the exchange and tax free except for the interest portion that comes in.  All the tax from gain remains inside the 1031 and is deferred for the seller.