I have one rental property and I want to find a way to finance a multi-unit building, and I would like to know if could I somehow make a 1031 exchange and use as a partial or a down payment. Thank you.
You can 1031 as long as the new property is of higher value than your current property.
@Mariana Rojas A 1031 exchange can be a great tool for someone who is interested in building their portfolio of properties. You certainly can sell your one rental property and complete a like-kind exchange. The equity from the one rental would need to be invested in the new property (or multi-unit building) and any debt you have will also need to be replaced. There are a number of requirements when completing a 1031 exchange (as mentioned above, you must trade equal or up in value).
@Mariana Rojas , The reinvestment requirements for sec 1031 in order to defer all tax are that you purchase at least as much as your net sale and you use all of your cash proceeds in the next purchase or purchases.
Since you're obviously buying more than you are selling and want to use the proceeds as a down payment it sounds like you meet the requirements for complete deferral.
Even if you wanted to buy less than what you sold or wanted to take cash out you can and simply pay tax on the difference while sheltering the remaining gain in your 1031.
I am wondering if when doing a 1031 can I 'switch' the debt portion from a traditional lender to using a partner in the new property?
An example would be I sell a place that I own for 400K that I still owe 200K on to a bank. The new property(s) are 600K. I reinvest my 200K of equity, and instead of borrowing the 400K from a bank, I bring on an equity partner for the 400K. Or, some mixture of an equity partner for say 200K and a bank loan for 200K.
Thanks, Dan Dietz
@Daniel Dietz Ultimately, you need to replace your debt. Replacing your debt typically involves taking out a mortgage but you can offset the debt portion by bringing cash to the closing of your replacement purchase or doing a mixture of both. You can bring an equity partner into the equation but you also need to take into consideration the same tax-paying entity requirement which states the same entity/person that is selling the relinquished property must be the same entity/person purchasing the replacement property. If your relinquished property has your name on title then you should be the only person on title for the replacement. If you give the exchange some time to season then you could add the equity partner's name onto title somewhere around the 24 month mark which is a pretty conservative seasoning timeframe.
@Daniel Dietz , There's a way to make that work. There is not a specific requirement that debt be replaced in any traditional sense. The requirement is that you purchase at least as much as you sell ($400K) and you use all of your cash proceeds ($200K) in the purchase.
So in your scenario you could absolutely purchase that property using your $200K as a down payment. You would need to take title to 2/3rds (400K worth) of the property as a tenant in common. Your equity partner could take title to the remaining $200K. If they were bringing cash then they bring 200. You bring 200 and there's debt of $200.
The key is going to be in the limitations on the interests of the equity partner. If you're giving them security in the form of ownership then they could only take title to the excess $200K. If you're giving them equity via agreement then that's essentially the same as a secured loan - works either way.
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