1031Exchange: Do You Know Your Options with Seller Financing?

Investors completing a 1031 Exchange while holding a note from the sale of their property have two main options, each with different tax implications:

1. Exclude the Note from the Exchange:

   Taxes will be paid over time as payments from the note are received using the installment method.

2. Include the Note in the Exchange:

   This defers taxes and offers several alternatives, such as:

   • Use the Note as Payment: Assign the note to the seller as part of the replacement property's purchase price.

     1. Replace the Note with Cash: Deposit cash equal to the note’s value into the exchange account before closing.

     2. Sell the Note: Sell the note on the secondary market and add the funds to the exchange.

     3. Pay Off the Note: If the note has a shorter term, settle it before the closing of the replacement property.

Consult with a financial or tax advisor to determine the best strategy for your situation.