 Property swaps and installment loans
Tax Talk by
George Saenz • Bankrate.com
 Dear Tax Talk,
I purchased a rental property from my parents
a few years ago on an installment-sale basis. My parents are holding
the first loan on the property and there are no other liens. Basically,
the property is family-owned.
I would like to use the 1031 exchange to purchase
a different property and, at the same time, retain having my parents
as the first lien holder on the new property to continue the installment-sale
payments. The desired result would be identical with the first property,
but under a new property title of the exchanged property. Could
my parents continue receiving payments for the installment sale
of the original property under the new property title or would the
IRS tax the remaining balance after the 1031 exchange? -- Property
Investor
 Dear
Property Investor,
An installment basis sale basically means that the seller reports
his gain over the period of time that he receives payments on the
loan. If you acquired the property a few years ago, your parents
were able to benefit from the drop in long-term
capital gains rates. It may not be a bad time for them to cash
in their mortgage loan and take advantage of the lower capital gains
rates that may increase in the future.
A section 1031 exchange provides that gain is deferred on the sale of one property when the proceeds of the sale are reinvested in like-kind property within a certain time period. A section 1031 exchange requires adherence to special procedures and is generally handled by a title company.
Special rules apply to subsequent dispositions of
property acquired on the installment basis from a related party.
These rules apply to a subsequent disposition within two years of
the acquisition, and would not apply in your case if, as you say,
you acquired the property a few years ago.
All that said, there should be no impediment to your parents continuing installment reporting on the new property. See IRS revenue ruling 74-157 for more information. | 
