Quote from @Dave Foster:
@David M., I was just trying to keep it 10,000 ft. Now you've got me dive bombing into the deep weeds :). I actually have an entire video on this and a chapter in the book.
The jist of it is that the cash proceeds and the owner carry note go into the 1031 account so they are not taxed as boot. They must be used in the purchase of the new property. But it's going to be tough if not impossible to get a seller to accept the owner carry note as part payment. So, instead, the exchanger brings in money and replaces the note in the exchange account with cash. Now the 1031 account has all cash and they can complete their exchange no problem.
And... outside their exchange account they have a note for the property they sold. They "paid" (the swap with the exchange account) face value for it so there is not profit in the note other than the interest that comes in.
@Dave Foster
If I understand this correctly, in the above scenario, let's say if @Luke Moore wants to buy something that's 70% of current property value. Buyer pays 25% down and he writes the remaining 75% into note. Since Luke really needs 70% of his current proceeds (not counting any expenses), he can create 2 notes, one for 30% of sales and one for 45%. He gave all proceeds to QI, then brings cash to exchange the note that's 45% of sales. Then he can use the 70% of sales in cash form to close on his new property. At the end of exchange, the boot is the 30% note remaining. This way, he won't have to bring money to the table for the entire 75% note and can enjoy interest collection of all the notes (assuming he doesn't have to sell them to get money). In exchange, he will have to pay tax on the 30% boot, which is probably not the end of the world tax wise.
