1031 with land owned outright

[Andrew Merritt]

I'm going to be selling some land that I own w/o a mortgage and will be doing a 1031 exchange with the proceeds.  Am I allowed to finance another property with the proceeds?  For example, my proceeds will be about $200k.  Could I use that as a 25% down payment on an $800k property?  Would there be any kind of negative tax consequences with this strategy or maybe I wouldn't be able to deduct mortgage interest?

[Jay Hinrichs]

Originally posted by @Dave Foster:

@Andrew Merritt the 1031 requires that you purchase at least as much as your net sale ($200K) and use all of the proceeds ($200K) to defer all tax.

You can always purchase more using a mortgage.  And you can purchase more than one replacement using the proceeds as multiple down payments.  

One particularly neat trick in your situation to shelter against a down turn and mitigate the tight timelines of a 1031 would be to purchase say two properties with your proceeds - one for cash and the other with maximum leverage.

Has the effect of eliminating the risk of leverage from at least one property so if the market goes south you have one protected. But you still get the ROI boosting effect on the other. And if you want in the future you can put financing on the free and clear one. the cash out doesn't have to be used in any certain time. So it's not urgent and pressured like the 1031.

I like this approach when I have 1031 out of free and clear and near zero basis land.. just pay cash for the next asset it cash flow handsomely and you now get some tax bene's that land  ( not timber land) does not give you  and your risk profile is very minimal.. I get very nervous with all these folks that want to leverage to the max :)  but hey I am old and conservative.   And I dont think we will have another Armageddon like 08 to 2011.. but man  there were some real damage done to very good investors when the banks froze and called their debt and no one to replace it..  If you get 20 or 30 year debt with NO call that is much safer.. the 20 due in 5 folks had some real issues