Seller Financing Strategies and 1031 Exchanges

In this real estate market where financing is sometimes not readily available, sellers who are motivated to sell  may offer to finance a portion of the purchase price.  At the closing, the buyer deposits some cash and signs a seller carry back note for the balance.  If structured as an installment sale under IRC Section 453, the seller pays tax on any gain as the payments are received rather than paying tax on the gain in the year of sale for the entire purchase price.

If the seller is also contemplating a tax deferred exchange under IRC 1031, he will have to decide how to treat the seller carryback note.  The note can either be kept outside of the exchange or, be included in the exchange.