1031 exchange strategy and reducing debt

Member since 2025 · 1 post · 0 votes

How best to reinvest, and control debt? We did not know that you have to carry the debt (boot) in a 1031 exchange. The whole point is to have less debt (we owe 600k) Ugh… This changes things. We have a contract for 1.5M on the sale home. We were thinking about buying two rental properties and carrying a small mortgage on each. That way if someone doesn’t pay the rent, there’s not a big note on the property. This way the renters pay the interest (generally speaking). The idea of giving the government over 100k inn capital gains makes me sick.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

11mo

@Lisa Lucero, what you are referring to is what we call a diversification exchange, when you sell one investment property and 1031 exchange into multiple smaller investment properties.

If you want to defer all of the tax, you must purchase at least as much as the net sale of your relinquished property and use all of the proceeds in your exchange.

If you receive any of the proceeds or purchase less than your net sale, it's called taking (Boot), like you mentioned. This is considered a partial exchange, and sometimes investors don't mind paying the tax or taking (Boot) on a chunk of the proceeds and sheltering the rest in exchange. But reducing debt by paying taxes isn't always optimal.

One thing you could consider would be to purchase the first replacement property cash and a mortgage on the second property, kinda like @Jason Wray had mentioned. You'll still have the same debt. But you've concentrated your equity. This can mitigate risk and let you immediately do a cash-out refi if you want to put something down on an additional property or need some cash.

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
11mo
Lisa,
When you have to use a 1031 exchange to buy anothe property and use all of the boot on a home or home(s). You can do a cash out refinance after you buy a home in as little a 6 months using the new appraisal. The cash out refinance is tax free.....
[email protected]727-637-4289
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Arman AhmedPro Member
Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 919 votes
11mo
@Lisa Lucero
That’s a tough spot, Lisa — a lot of investors run into that same surprise with the debt replacement rule in a 1031. Some end up diversifying into lower-cost Midwest markets to stretch their equity and keep leverage low while still meeting the exchange requirements. It can be a good balance between debt control and tax deferral.

[email protected]614-418-6081
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
11mo
@Lisa Lucero, what you are referring to is what we call a diversification exchange, when you sell one investment property and 1031 exchange into multiple smaller investment properties.

If you want to defer all of the tax, you must purchase at least as much as the net sale of your relinquished property and use all of the proceeds in your exchange.

If you receive any of the proceeds or purchase less than your net sale, it's called taking (Boot), like you mentioned. This is considered a partial exchange, and sometimes investors don't mind paying the tax or taking (Boot) on a chunk of the proceeds and sheltering the rest in exchange. But reducing debt by paying taxes isn't always optimal.

One thing you could consider would be to purchase the first replacement property cash and a mortgage on the second property, kinda like @Jason Wray had mentioned. You'll still have the same debt. But you've concentrated your equity. This can mitigate risk and let you immediately do a cash-out refi if you want to put something down on an additional property or need some cash.
The 1031 Investor5137 Reviews
Website View Page
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