Installment Notes As Boot

     IRC453(f)(6) provides certain rules for combination exchange and 

installment sale. Under these rules basis is first allocated to the 
replacement property up to its fair market value. If basis exists in excess 
of the replacement property's fair market value, then the excess is 
allocated to the installment note.  Accordingly, in most instances, the 
installment note will not be allocated basis and 100% of each payment will 
be taxable.

     Example:

        "A" exchanges real property with a value of $100,000 and a basis of 
        $20,000 for real property with a value of $70,000 and a note of 
        $30,000.  The $20,000 is allocated to the replacement property and 
        nothing to the note.  If the property were sold without an exchange,
        "A would pay taxes on $20,000 ($100,000 less $20,000 basis) at the 
        rate of 80% of every principal dollars received. Since this 
        transaction is an exchange, "A will pay tax on $30,000 as he 
        receives it and not pay tax on the $50,000 balance of the gain.
          
          Note: The gross profit percentage on the exchange 
            installment note is 100%.
          
               In conclusion, and in my opinion:

     1.   As long as the installment note is less than the profit in the 
          property sold, there is an advantage to a combination installment 
          sale/exchange transaction over an installment sale by itself.  If
          the installment note is in excess of the profit on the property 
          sold, the taxpayer would not benefit by the combined transaction.

     2.   It would save taxes by using one of the seven solutions to seller 
          financing rather than the taxpayer accepting an installment note 
          as part of an exchange transaction.