Notes and Seller Financing in a 1031 Exchange (Seller Carrybacks)

In recessionary times seller finance gets more and more common. It has often been said that you cannot do an Exchange while carrying a note, but this is NOT TRUE. Please note that if seller finance is an End Game for you, there is tax exposure on debt relief and depreciation recapture in the year of disposition whether you receive a principle payment or not.

A “seller carry back”, a “contract sale” or a “note and trust deed” sale are all terms that describe forms of seller financing.

Since a note typically represents equity in a property and a 1031 exchange requires all equity to be carried forward to be completely tax deferred, it is necessary to use the note in the exchange if you intend to defer all your taxes. You have several options available to incorporate the note in the exchange.

To walk through this concept and more, tune into our latest ADVANTAGE TV blogcast update with David Moore!

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