Cap Gains / 1031 Exchange / Seller Financing

[Brendan H.]

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!

[Dave Foster]

@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).