In a real estate transaction, a seller is occasionally asked to finance a portion of the purchase price in the form of a “seller carryback note.” At the closing, the buyer gives the seller the agreed upon down payment and pays the balance over time, as described in the note. If structured as an installment sale under IRC Section 453, the seller pays tax on the payments as they are received rather than paying tax on the gain for the entire purchase price.
If the seller is also contemplating a tax deferred exchange under IRC § 1031, he will have to decide how to treat the seller carryback note. The note can either be kept outside of the exchange or, under the limited conditions described below; it can be included in the exchange.
See articles below for more information on Seller Carryback Notes.