1031 TaxPak


How to Report the Handling of Contract Notes (Seller Financing) in a 1031 Exchange

There are a number of terms used for seller financing: "Contract for Deed," "Owner Carry Note," "Seller Contract," "Purchase Money Financing," etc. These all describe a situation where the buyer wants the seller to provide a portion of the financing. For example, Bob Buyer wants to buy your rental house for $200,000 and can provide $170,000 of cash if you will carry the balance of $30,000 for five years, at which time he will pay you off. The $30,000 portion is the seller financing we're talking about.

There are two ways to handle seller financing in a 1031 exchange, and each has a dramatically different tax impact. In the first example, the note comes to you and you pay tax on it. In the second example the note comes to us and passes through your exchange tax free. Let's discuss each alternative in detail.


When To File Forms

When to File Form 4797

Form 4797 is where you report the sale of property used in a trade or business. If you don't have a taxable gain, you do not have to file this form.

Use this form (rather than Schedule D) to report any gain arising on Line 21 and/or Line 22 of Form 8824.

In our own Buy-Down example, Fred and Sue had a taxable gain of $8,000 that would be reported on Form 4797, page 1, on lines 16, 17, and 18b.

Download Form 4797 here
The IRS Instructions for Form 4797 are available here




No errors have been discovered in TaxPak as of December 11, 2020.



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