Selling with a 1031, Can I seller carry back a 2nd Mortgage

[Bob E.]

We have on an offer for 20k over ask on our Phoenix listing (on the market one day) and the buyer is worried about the appraisal.  

We are selling through a 1031.  Can I offer to carry back part of the sale price if the appraisal comes in low?  I could find a friend to write the second and then buy it back from them after closing but it seems simpler if I can write it myself.  I do have cash if I have "fund" the sale" and take the note back.  TIA

[Dave Foster]

@Bob E., You can.  The note will be considered a proceed of the sale.  So if you take title to the note you will pay tax on that amount as boot.  If you have the note made to your QI and placed in the exchange account with the cash then you can use it as part of the purchases and still defer all tax.  You'll either sell the note before it's needed, offer the note to the seller of the property you want to buy, or you'll replace the note with cash from any outside source.