Updated 3 days ago on . Most recent reply
1031 exchange strategy and reducing debt
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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- Qualified Intermediary for 1031 Exchanges
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@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.
- Dave Foster
