Excellent piece, Samantha. This is a thorough treatment.
I wanted to add just one additional note that investors in particular should know: trying to add seller financing to a transaction the start of a 1031 exchange can create some obstacles.
In a typical owner-carry situation, the value of the note that's held back will exist outside of the 1031 exchange structure. This means that payments made on the Note will represent income that is taxable (rather than deferred through the 1031) as they are received. Interest income taxes will also apply as payments are made on the Note.
Even more problematic, the amount of depreciation recapture allocable to the value of the note will be realized in the year of sale. Many times, this creates really large tax liabilities for the seller when they may be in a cash poor position if most of the note is still outstanding.
There are several traditional remedies for this, but the most common is to have the seller/exchangor (or some third party) loan funds equal to the value of the note to the buyer outside of closing. All of these funds can then be brought to the closing table and escrowed as with any other 1031 exchange. It is also possible for the seller to draft the note so that it's payable to the 1031 exchange accommodator, in which case the accommodator can then sell the note to the seller or any other party and turn around and put the proceeds from that sale into the seller's exchange account.
Just something that investors should look out for when they're contemplating a 1031.
