Can I use more debt on a 1031 exchange?

3 Replies

I have received conflicting information on this so I thought I would ask here to share with others who may be interested in finding the answer.

I have a property I bought for 800k. I am selling for 1 million (after closing costs and comissions) and the note is now 600k.

I was wondering if I could I could buy a property with 200k down and 1 million total value and pocket the other 200k tax free. 

Could I also break it down and buy two properties at 500k 80% ltv?

In other words, can I increase the debt on my 1031 exchange and what are the tax consequences of the money that remains?

No.  You must meet 2 minimums; ALL the cash received from the sale must be reinvested AND the replacement property must be at least the same price (net of closing costs).  Any cash not reinvested is taxed, and causes ALL recapture taxes to be triggered.

@Brett Jenkins  @Wayne Brooks is right.  In order to defer all tax you have to purchase at least as much as your net sale (contract price less costs of sale not including mortgage payoff).  And you must use all of your proceeds in the next purchase or purchases.

However, nothing would prevent you from buying for 1 mil and putting 400 down and immediately refinancing or putting a loc on the property for the 200 you want in cash.  It is perfectly fine to do that after the fact.

As to your question about multiple properties that too is perfectly acceptable.  Commonly called a diversification exchange you can divide the cash between as many properties as you want as long as you meet the two prong rule of purchasing at least as much as you sell and using all the cash to do so.

It is not uncommon for an investor to purchase one property with the minimum down and another property with the remaining excess cash down so they can refinance that property after the fact and take cash out.

Brett just remember that multiple exchanges and the timing gets much more complex and harder to pull off.

I had a guy contact me once with a 600k tax bill if he didn't exchange. He had this elaborate plan to pick out multiple properties with 2 weeks left before his exchange ran out!

He had already sold his properties. I get the plan as he wanted diversification but something like that he needed to put in place with months to spare to be safe. He ended up eating the tax bill as there was just not enough time with the notice he gave for due diligence.  

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