Most people would probably be surprised to know how seller financing in 1031 exchanges can work. A seller wants to do a 1031 exchange, but they end up with a buyer asking for owner financing.
Do they have to reject the offer?
Not necessarily. If structured properly, a note can be created (giving the buyer what they need) and then sold, giving the seller the cash they need for their upleg.
In this month’s Property & Paper Live, I break down exactly how seller financing in 1031 exchanges works in the real world — plus the pitfalls, timeline traps, and creative strategies that experienced investors use to pull these deals together smoothly.
A Real Deal: Seller Financing + 1031 Exchange + Creative Note Buying
Here’s a classic example I shared live on the zoom:
- Property listed for $500,000 – no offers for months
- Then a buyer offers full price but needs owner financing for 3 years
- Buyer had $200,000 down and needed a
- $300,000 note at 5% for 3 years
Great price… except the seller wants a 1031 and doesn’t have other funds to add to the exchange to address the tax liability.
How did we massage this to make it work for everyone?
To make it all work, the sale price was bumped to $525,000 to handle the slight discount, and I turned the listing agent into the note buyer. She bought the $325,000 note for $300,000 with idle funds that were making 1% at best.
She was happy with 8% whereas an arms length institutional buyer would have needed a higher yield, requiring a deeper discount.
So… the seller netted the cash equivalent of a $500K cash sale.
Of course, an agent is rarely going to be able or willing to do this, but every situation has opportunities that are often missed by people who are not familiar with the secondary market for private seller carry back notes.
Seasoning Requirements: Why Note Buyers Prefer a Payment History
Most note buyers want no less than one month of seasoning before they buy a note. Some want 12 months, and may need up to 24 months for ‘rehabber paper’… (those notes created when a real estate investor buys a property for cheap, fixes it up and sells it on terms to a buyer).
But during a 1031 exchange, you don’t have time for seasoning.
Note creation and note sale often have to happen very close together inside of the Qualified Exchange. That’s where the simultaneous close, or table funding, comes in.
What Is Table Funding?
Two linked closings:
- Close the sale + create the note
- Immediately sell the note in a second escrow
Sometimes these close seconds apart. Sometimes within a day or three. But to pull this off, you need strong relationships and professional assistance in structuring the transaction in a way that will allow the numbers to work for all parties.
This is seller financing in 1031 exchanges at its highest level of finesse.
What Note Buyers Want (Especially in 1031 Deals)
When an investor buys a fresh, unseasoned note, they expect compensation for the extra risk.
The non-negotiables:
✔ Large down payments (30%–50%)
This is the magic ingredient in seller financing inside 1031 exchanges.
Big down payments reduce:
- Risk of default and foreclosure
- Risk of financial loss
- Required discount when selling the note
The down payment is the soul of the deal. If the buyer brings 50% down, almost any note becomes marketable.
If they bring 10% down? That can be perfectly acceptable in situations where the seller is happy using the Installment Sale (IRC Code 453) long term to defer most of their capital gains.
But when the note is created for immediate selling, as within a 1031, the numbers don’t work as well.
✔ Valuable asset sold at it’s true ‘as is’ 30-day cash value price
At the end of the day, the property is the ultimate ‘the-buck-stops-here’ payor for the note.
Risks: The Real Reason Note Buyers Stay Conservative
Seller financing in 1031 exchanges is powerful, but it’s not risk-free. Investors must factor in:
- Job loss
- Bankruptcy
- Property damage
- Long foreclosure timelines
- Legal fees and holding costs
That’s why skilled note buyers prefer:
- Conservative ITV (investment-to-value) ratios
- Large down payments
- States with quick foreclosure timelines
Risk is real… but manageable with intelligent underwriting.
A Bigger Perspective: Building Alternative Economies
Near the end of the show, we talked about something deeper.
Seller financing isn’t just a financial strategy.
It’s a form of economic independence.
It’s people helping people.
One Mom ‘n Pop to another.
Creating wealth without relying on banks, Wall Street, or rigid institutional systems.
When you understand how to combine seller financing in 1031 exchanges, you gain the ability to:
- Solve problems
- Rescue deals others walk away from
- Create passive income
- Build wealth quietly and sustainably
- Support your community
That’s the real reason I love this work.
Final Thoughts
If you’re a:
- Realtor
- Investor
- Note buyer
- Landlord
- Tax-deferred strategist
…you absolutely need to understand how seller financing in 1031 exchanges works.
This is where creativity meets tax strategy meets private capital.
And it’s where the most elegant deals are born.
If you want to sharpen these skills, join us live each month on Property & Paper Live, and explore the books, courses and consulting available in my shop:
- Landlord Liberation
- Seller Financing Mastery Course
- Schedule a 1:1 Deep Dive Strategy Session
This knowledge truly is money in the bank.
(Or better yet — outside the bank.)