Seller wants 1031- I want seller financing

[Adam R.]

I am trying to finalize terms on a seller financed deal. The seller wants to do a 1031 exchange and has reservations about seller financing understandably so. I'm considering offering a large down payment(maybe 50%), then no monthly payments, and a balloon payment for the balance due at 5 years. Effectively it would be a 0% loan. Would this structure help the seller from a 1031 perspective?

[Dave Foster]

@Adam R., you're heading the right direction.  But 50% may not be enough to benefit him.  It all depends.

In order for him to defer all tax he must purchase at least as much as his net sale.  And he must use all of the proceeds of the sale in the next purchase.  Proceeds include both cash and cash equivalents (the note).

This is the problem.  If he only reinvests the cash he has taken boot in the amount of the note and that will be taxable to him.  Yes as it comes in but still taxable.

However, if he can replace the 50% note that is in his exchange account with cash from any other source then he could still do a complete exchange and offer owner financing to you.

Easy example - The property is for sale 100K.  You give him 50K cash and a note for 50k.  Both go into his exchange.  He has to buy 100K in real estate and spend 50K in cash and 50K in a note to do that.  Offering an unseasoned note to a 3rd party as part of a purchase is tough.  But if he were to replace the note with 50K of cash then his exchange acct. has 100K in cash and he can complete his exchange.  

Meanwhile outside the exchange he has a note from you that is now non-taxable except for the interest which sounds like would be 0.