Can I finance the sale of my property (seller carry back note)?
Certainly. Yet, for a complete tax-deferred exchange, the buyer must settle all notes, and the acquisition of the property must conclude within the 180-day timeframe. Failure to fulfill the note payments within this period may result in a portion of the exchange proceeds in the 1031 Exchange being used to acquire like-kind property, while the funds from the note are treated as an installment sale and become taxable upon receipt.
Example 1: Fully Deferred Exchange
• The Relinquished property is sold for $500,000.00.
• The buyer provides $200,000.00 in cash, and the seller issues a $300,000.00 carry-back note with a 3-month term.
• The $200,000.00 is deposited into the 1031 Exchange account, and the $300,000.00 note is made payable to the Exchange Accommodator.
• After the 3-month term elapses, the buyer pays the $300,000.00 to the Exchange Accommodator, and the taxpayer (seller) purchases a replacement property for $500,000.00.
This transaction qualifies as a fully deferred exchange.
Example 2: Partially Deferred Exchange
• The Relinquished property is sold for $500,000.00.
• The buyer provides $200,000.00 in cash, and the seller issues a $300,000.00 carry-back note with a 3-year term.
• The $200,000.00 is deposited into the 1031 Exchange account, and the $300,000.00 note is made payable to the Seller.
• The seller subsequently acquires replacement property for $200,000.00 and receives payments on the note in installments.
This constitutes a partial exchange, and the proceeds from the installment payments on the note are taxable upon receipt.
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