Cap Gains / 1031 Exchange / Seller Financing
Scenario: I buy a house from a Seller for 900K, but they still owe 200K.
I give them 200K as my down payment, so they can pay off their loan.
They carry the remaining 700K back with Seller Financing.
They had owned it as a rental property.
Do they pay Cap Gains on anything? On 200K? On 900K?
Thanks!
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- Qualified Intermediary for 1031 Exchanges
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@Brendan H., Immediate tax on depreciation recap. And the $200K down payment will be part taxable. Any cash to them will be a mix of capital gain and interest. I don't think their accountant will let return their basis first.
It's possible to 1031 with a note. The note itself is a proceed of the sale. So it must go into the exchange account. But if they have or can get $700K from anywhere else they can swap that with the note in their exchange account so they have $700K in their exchange account and the note now outside their exchange account.
Then they complete their 1031 exchange and the note is now not taxable (other than the interest).
- Dave Foster
