Client wants to sell a house he has constructed with $1.3 Mill loan and the land was purchased in 2005 with a like kind exchange, (I was not the CPA for 2005) with tax basis $450K (deferred gain of $297K). He wants to sell 75% of the house (and retain 25% in his name) to a buyer that can not qualify for the loan (new arrival in this country) but has (legal) cash. The client will do a wrap-around mortgage, subject to bank's approval. The estimated value before an appraisal is $1.4M and at 100% value the client will have a loss of $350,000 ($262,500 at 75%). Client wants to occupy the new house and the buyer will occupy the client's old house that is on the market for $690K with no offers. After 3 to 4 years depending on market conditions, client wants to buy back the 75% interest sold when a potential creditor issue is resolved on another real estate development. Client is obtaining the occupany permit in his name. My advise assuming that there are no legal issues with the creditor (bank) on the other real estate development is to sale 100% of the house (not 75%), with the wrap around (if approved), only occupy the house after the sale, and pay the buyer rent for the fmv difference in the new vs. the old house. He will have to report interest income and interest expense on the wrap-around. I know this is unusal situation.

I'm not sure what the question is? 

Why would you do a 1031 exchange if you have a loss?

I agree - sale of partial interest with retaining rental interest will make things complicated.   I would treat this similar to related parties especially regarding the rental income and deductions.

Retaining the 25% interest may make bring into question the prior exchange because for at least 25% of the house he did not hold it for investment.