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Featured Article

Seller Financing and 1031 Exchanges: Can You Still Defer Taxes?

In today’s market, seller financing is making a comeback. Whether it's to help a deal pencil out or to get across the finish line in a high-interest environment, more sellers are carrying paper. One of the most common questions we hear when this structure comes into play is:

“Can I still do a 1031 exchange if I offer seller financing?”

The short answer: Yes, you can. But the structure matters—a lot—and it's important to understand your options and the implications for tax deferral. Let’s walk through an example:

Scenario:

• Sale Price: $1,000,000

• Existing Mortgage: $0

• Cash at Closing: $500,000

• Seller Financing Note: $500,000

• Reinvestment Goal (to fully defer taxes): $1,000,000

You’ve got three main paths forward:

Option 1: 1031 Exchange on Cash Only

You exchange the $500,000 in cash and pay capital gains taxes on the remaining $500,000 (the seller note), which is treated as boot—a taxable portion of the sale.

This may be acceptable in some cases, but you’ll want to model the tax hit carefully with your CPA before proceeding.

Option 2: Exchange the Cash and the Seller Note

In this scenario, you attempt to assign the note as part of the consideration in your next purchase. In theory, this gets you to your $1M reinvestment goal and avoids boot.

However, this is the trickiest option:

• The seller of the replacement property must agree to accept the note as partial payment.

• Your Qualified Intermediary must be on board.

• You’ll need solid legal guidance to structure it correctly.

This can work, but it’s complicated and not for the faint of heart.

Option 3: Exchange the Cash, Replace the Note with New Cash

This is usually the cleanest and most straightforward solution. Here’s how it works:

• Exchange the $500,000 in cash.

• Bring in an additional $500,000 from savings or a loan.

• Buy a $1,000,000 replacement property.

You’ve met your reinvestment requirement and fully deferred capital gains taxes—no boot, no headaches.

Bottom Line:
Seller financing doesn't kill your ability to do a 1031 exchange—but it does make it more complex. If you're considering this strategy, get your CPA, legal counsel, and exchange accommodator involved early so you don’t trip over the details.

Have questions? We're here to walk you through it.

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