1031 Exchange with Seller Financing - Possible? Easiest structure?

Question

Hello! I have a 1031 Exchange / Seller Financing question.

We're trying to make an offer on a property with a seller by offering him seller financing. 40% down payment. He owns it in cash so he doesn't have any loan to pay off.

Can he do a 1031 exchange in this scenario?

Would it just be on the actual proceeds amount (i.e. sale price LESS seller carryback amount)?

Any tips on how to structure?

Trying to make this easy for him to say "yes"!

Thank you,

Kim

Dave Foster · Answer

@Kim Hopkins, quickest response to a forum post in history.  Or should we say quickest draw in the west to continue @Jonathan R McLaughlins Shane reference.  Great to chat with you.

Kim Hopkins · Answer

Thank you! Calling you now!

Jonathan R McLaughlin · Answer

@Dave Foster where are you?? (said in the voice of "SHANE!!!)

following

Dave Foster · Answer

@Jonathan R McLaughlin, LOL - Shane!!!   @Kim Hopkins it is possible to do a 1031 exchange with owner financing.  But they have to keep the two reinvestment requirements in mind.  In order to defer all tax they must purchase at least as much as their net sale.  And they must use all of the proceeds in their purchases.  Any amount they purchase less than they sell.  Or any amount of proceeds they take personally will be treated as profit and taxable.

the cash down payment is one proceed.  the note/mortgage they are carrying is another proceed.  Both of those must go into the exchange account if they want to avoid all tax.  While the note is in the exchange account and before they have to purchase their replacement property they can swap the note with cash from any source.  This leave them with only cash in the exchange account and they can finish their exchange.

The note is now outside the exchange account an it is non-taxable except for the interest portion of the payments.

Not everyone has access to that kind of cash.  But it can work beautifully.  I have a colleague request out to you if you'd like to discuss offline.

1031 Exchange with Seller Financing - Possible? Easiest structure?

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