Yes, the IRS has issued combined transaction reporting rules for a partial installment sale and partial exchange. An installment note can also be handled in one of several fashions to accomplish a “pure” exchange:
Option #1- Exchanger can try to locate a seller of a replacement property who is willing to take the note as part of the consideration. If the seller is motivated and the note is well secured, this could be a viable approach. The intermediary, as the Beneficiary of the Note and Trust Deed, would give the cash and note to the seller in return for the replacement property. In this case the exchangor does not receive the "paper".
Option #2-The Intermediary could sell the note (usually at a discount) and apply the cash proceeds towards the acquisition of the Like-Kind replacement property. The cash proceeds would be added to the funds the Intermediary was holding from the sale of the relinquished property. Any discount from the sale of the note would have to be offset with additional cash from the Exchanger before the acquisition property is closed.
Option #3-An aggressive twist on #2. In a separate transaction, the Exchanger may purchase the note from the Intermediary. The Intermediary would, in turn, apply the combined funds from the note sale and the sale of the relinquished property to acquire a replacement property. Care must be taken so that the note sale is indeed a separate transaction. There is a possibility that the IRS would view the Exchanger's receipt of the not from the Intermediary as boot, or even worse, as constructive receipt, thereby endangering the exchange.
Option #4- If Option #3 cannot be properly documented, the Exchangor may wish to lend $20,000 to the Buyer of the relinquished property in a separate and independent transaction, in return for a note and deed of trust to be secured by the property. The Buyer would then purchase the property from the Intermediary for $200,000 cash. The Intermediary now has $200,000 cash to use to acquire the replacement property.