1031 replacement property mortgage: conventional or commercial?

8 Replies

Do I need to use a commercial mortgage/note to buy a replacement property on a 1031 exchange?

I sold a property, used a 1031 qualified intermediary to hold the funds, and now I want to buy the replacement property. I currently have no mortgages, and was thinking it would be nice to use a conventional mortgage to buy the property as they are typically lower interest. I have no problem putting the property or mortgage in my name instead of a LLC or corporation, is there a way to use a regular 30yr conventional mortgage when I buy the replacement? The 1031 rules don't say anything about the mortgage being commercial, only that it be like-kind and greater than the one it replaces, and that all the cash must go into the replacement property.

The tax ID that owned the previous property must purchase the replacement property. If an LLC owned the sold property it must own the replacement property.

They do not care the form of the debt, it just must be equal or greater than the previous debt. 

The previous property was owned in my personal name.  So you are saying that I should not have the replacement with my wife even?  Or is it just OK that it is still in my personal name (but also has her name)?

Can you shed any light on what the bank might care about?  They asked me if it will be primary residence since that is the best rate and I told them no, but otherwise will the IRS care about the mortgage type?

That’s a @Dave Foster type question. 

I BELIEVE if you file your taxes jointly you can add her name. If you don’t have to add her name to get the new mortgage I BELIEVE  you could do the swap in just your name and add her later. (Unless you live In a community property state in which case she gets half anyway and there may be no need to add her.)

Originally posted by @Steve Smithy :

Do I need to use a commercial mortgage/note to buy a replacement property on a 1031 exchange?

I sold a property, used a 1031 qualified intermediary to hold the funds, and now I want to buy the replacement property. I currently have no mortgages, and was thinking it would be nice to use a conventional mortgage to buy the property as they are typically lower interest. I have no problem putting the property or mortgage in my name instead of a LLC or corporation, is there a way to use a regular 30yr conventional mortgage when I buy the replacement? The 1031 rules don't say anything about the mortgage being commercial, only that it be like-kind and greater than the one it replaces, and that all the cash must go into the replacement property.

 Commercial v residential mortgage makes no difference, to the best of my understanding.

I worked on a deal wherein an investor swapped a pair of Oakland SFRs for a midwest shopping mall... That shopping mall obviously wasn't a residential mortgage. 

@Steve Smithy you can definitely do a conventional mortgage. The financing has zero bearing on the 1031 exchange. I recently did a 1031 exchange locally here in the Berwyn market, and the buyer used a conventional loan. The main thing is that if your personal names were used on the property you are selling you will need to take title in the same names. 

As an example, I did one deal recently where the client owned a property in a trust with a name about a paragraph long. I had to carefully put this name on all of the contracts so that the 1031 exchange would be valid. 

Ok @John Warren that's good to know!  So as long as the bank is ok with me treating it as an investment and not my primary residence it doesn't matter what kind of mortgage.  Thank you!

@Steve Smithy no problem! You can also run all of this by you 1031 exchange company as well. 

@Steve Smithy The irs does not care where or how you access money to complete your 1031 exchange.  As long as you purchase at least as much as your net sale and use all of your net proceeds in the replacement you’ll defer all tax.  The source of any debt doesn’t matter.

Regarding you filing question @Bill Brandt Nailed it.  The tax payer for the property is actually the tax return that reports the activity of the property.  If you and your wife file a joint return that return us the taxpayer- the guarantor of the loan and the deeded owner can be either of you.  The tax payer does not change as long as it continues to be reported on that tax return.

We see this frequently with qualifying debt on replacement properties.

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