Should I carry the financing when I sell my apartment building?
Carrying paper, or seller financing, means you act as the bank: the buyer gives you a down payment and a note secured by the building, and you collect principal and interest instead of a lump sum. The tax engine underneath is the installment sale: capital gain is recognized as payments arrive, spreading the bill over years instead of stacking it into one bracket-busting season. It can beat a 1031 for a seller who wants income rather than another building, but you are trading closing certainty for credit risk, and the note is only as good as the borrower and your down payment.
Answered by Shaya Lowenstein, a Los Angeles multifamily broker at Lyon Stahl Investment Real Estate, CA DRE 01942326, with 15 years in apartment buildings and land across Los Angeles County. His closed sales are published with addresses and recording dates, so anything claimed here can be checked against the county record.
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The tax math and the note terms.
Spreading gain over five or ten years of payments can keep you out of California's top brackets and below federal thresholds that a lump-sum sale would blow through, which is meaningful in a state that taxes the entire gain as ordinary income. Two caveats your CPA will flag. Over $5,000,000 of installment obligations outstanding at year end, IRC 453A charges you annual interest on the deferred tax, which claws back part of the benefit on precisely the deal sizes this guide is about. And straight-line depreciation recapture on residential property generally spreads with the payments, but certain accelerated recapture is recognized in the year of sale regardless of when the cash arrives. On terms, protect yourself like a bank would: 25-35% down so the buyer has real skin in the game, a rate above what banks charge (you are more flexible; charge for it), a five-to-ten-year balloon, professional loan servicing, and a first deed of trust, not a second.
When it beats a 1031, and what can go wrong.
A 1031 defers everything but hands you another building to run and a 45-day clock to beat. Seller financing suits the owner who wants to be done operating: no identification deadline, an income stream at a rate you set, and often a price premium: buyers pay up for financing they cannot get from a bank, especially on buildings with quirks lenders dislike. The risks are concrete. If the buyer defaults, you foreclose, in California typically through a trustee's sale taking several months, and you get the building back in whatever condition and tenancy the buyer left it. If you still have your own mortgage, wrapping it risks the lender's due-on-sale clause. Underwrite the buyer the way a lender would: financials, track record, reserves.
EDUCATIONAL ONLY, NOT LEGAL OR TAX ADVICE. RATES, THRESHOLDS AND ORDINANCES CHANGE, AND SEVERAL OF THE FIGURES HERE DEPEND ON FACTS SPECIFIC TO YOU. CONFIRM ANYTHING YOU PLAN TO ACT ON WITH YOUR OWN ATTORNEY OR CPA, OR WITH THE AGENCY THAT SETS IT.
How much should I require as a down payment?
Enough that walking away genuinely hurts the buyer, commonly 25-35% on multifamily. A thin down payment converts your note from an investment into an option the buyer holds against you.
What happens to my taxes if the buyer defaults and I take the building back?
Repossession has its own tax rules that generally limit the gain recognized on taking the property back, but the calculation is genuinely complex. This is a before-you-structure-it conversation with your CPA, not an after-the-default one.
Can I combine seller financing with a 1031 exchange?
Awkwardly. The note you carry is not like-kind property, so it is taxable boot unless specially structured. Most sellers choose one strategy or the other; hybrids exist but need a tax advisor driving.
SHAYA LOWENSTEIN · LYON STAHL INVESTMENT REAL ESTATE · DRE #01942326 · (323) 944-2221