Pay cash or finance? - 1031 with proceeds going toward 2 properties

Portland, Oregon
Creative Real Estate Financing
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Pay cash or finance? - 1031 with proceeds going toward 2 properties

Gerich Fellermann
Investor · Portland · Member since 2018 · 26 posts · 8 votes

Hi all,

I am in the middle of a 1031 and am contemplating purchasing 2 properties with the proceeds of my sale ($600k).  I'm pre-qualified for ~1.25m

I have a property under contract in OR for $775k (A) which does not fully satisfy my reinvestment threshold and would leave me with a boot.

I am looking at a second property for $350k (B) in NM. 

I would be working with 2 different lenders so would potentially have 2 different loans

Question: How should I split up the downpayments to purchase both properties?  

Property A is the priority and will likely close first.  

Property B would cash flow and would help me avoid the boot.

Should I pay cash for PropB to avoid loan fees and potentially refinance costs down the line?   (also just for simplicity)

Are there tax issues to consider?  Other thoughts?

Thanks for any input,

G

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8mo

@Gerich Fellermann, If your lending will allow it's never a bad time to concentrate equity. This makes it that much easier to access that equity later. Because, as you know, a cash-out refinance is not a taxable event. So, purchase that second property for cash. And use the remaining of your 1031 account as a down payment on the first property. That free and clear property is now free from mortgage risk. And you avoid the cost of a second loan right now. But the equity is available to you at any time once your 1031 is complete.

You're handling your 1031 like a pro!!

The 1031 Investor5137 Reviews
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8mo

    @Gerich Fellermann, If your lending will allow it's never a bad time to concentrate equity. This makes it that much easier to access that equity later. Because, as you know, a cash-out refinance is not a taxable event. So, purchase that second property for cash. And use the remaining of your 1031 account as a down payment on the first property. That free and clear property is now free from mortgage risk. And you avoid the cost of a second loan right now. But the equity is available to you at any time once your 1031 is complete.

    You're handling your 1031 like a pro!!

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
  • Gerich Fellermann
    OP
    Investor · Portland · Member since 2018 · 26 posts · 8 votes
    8mo

    Thanks @Dave Foster.  Slowly but surely......

    1Reply
  • Pierre Guirguis
    Lender · Marlboro, NJ · Member since 2025 · 243 posts · 150 votes
    8mo

    A couple of clarifications that matter in practice:

    The key rule in a 1031 isn’t just total purchase price, it’s how exchange equity is deployed and when. Any exchange proceeds you don’t reinvest, or any reduction in debt compared to the relinquished property, can create boot unless offset elsewhere.

    A common approach in a two-property exchange like this is:

    • Use exchange funds as equity across both acquisitions to fully absorb the $600k
    • Finance where leverage improves overall portfolio flexibility, not just simplicity

    Paying cash for Property B can make sense if:

    • You still deploy all exchange proceeds into replacement property
    • Your relinquished debt is adequately replaced across A + B
    • You’re comfortable that any later refinance is clearly separated in time and intent from the exchange (to avoid IRS scrutiny)

    One thing I’d be careful of is sequencing. Since A is closing first, you’ll want to make sure the QI and lenders are aligned so funds are allocated intentionally and you don’t accidentally strand exchange cash or create boot just because of timing.

    At this stage, the most important conversations are actually with:

    • Your QI, to map proceeds and timing cleanly
    • Your CPA, to confirm debt replacement and boot exposure under your exact numbers

    Structurally, there’s no single “right” answer here but there are a few wrong ones if timing or debt replacement is mishandled.

    1Reply
  • Gerich Fellermann
    OP
    Investor · Portland · Member since 2018 · 26 posts · 8 votes
    8mo

    @Pierre Guirguis - Thank you for the thoughts, very much appreciated.

    1Reply
  • Frankie VozziBusiness Member
    Member since 2025 · 358 posts · 89 votes
    7mo

    Hello Gerich, with a 1031, the big rules are replacing equal or greater value and debt. Paying cash for B can work if total value and debt replacement are met, but many investors maximize leverage on A and use remaining exchange funds for B to avoid boot and keep flexibility. Refinancing later is common, but timing matters. Best to coordinate closely with your QI and CPA.

    [email protected]516-888-7750
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