Pay off debt + 1031 exchange?
Hi, we have a property we have held for nearly 4 years. It cashflows and has appreciated in value since we purchased. With the profits, we are looking to sell it to pay off debt, get us out of the rat race, and pick up another rental property (we would have the next property nearly paid off).
My question is: Can I use part of the profits to pay off consumer debt (credit cards and student loan) and 1031 exchange the rest into my next property? Is there a better strategy for accomplishing what I am trying to do? (Such as maybe 1031 exchange all the profit, purchase the next rental and pull equity out with a HELOC to pay off consumer debt).
Strategy #2 makes the most sense to me... still just trying to wrap my head around it. Any ideas welcome. Thanks!
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@David Stone, your instincts are serving you well. You can do either scenario but scenario 1 results in a taxable event. This would be called a partial exchange. In order to defer all tax in a 1031 exchange you must purchase at least as much as you sell and use all of the proceeds in the replacement purchases. If you pull money out you can. It will not invalidate your exchange but you will pay tax on what you pull out.
In scenario 2 you complete a full 1031 exchange so all tax is avoided. Your refi after the fact is perfectly fine and generates tax free cash that you can use for other purposes while your tenants pay the mortgage.
Awesome, thanks!
