10-31 Title Exchange

4 Replies

Can you use the money from a 10-31 tax exchange to pay off the loans on existing mortgages? Seems like it would be a good way to increase cash flows while scaling down a portfolio so you could hold fewer properties as you get older and have higher cash flows but still defeating tax if it’s allowed

Not a 1031 expert here but from what I've read the short and sweet answer to this is "no". To perform a 1031 exchange and deferred all of the taxes you must invest all of the money received into a like king property. If you attempt a 1031, receive the cash stating "you'll invest this into your other properties" at that point it no longer is a 1031 and you'll need to pay taxes on your gain.

A 1031 exchange requires an “exchange” of property, meaning you must acquire new real property.  Unfortunately, paying debt on another property is not an exchange because you already own the other property.  You could set up 2 entities and have Entity 2 with old properties acquire an interest in the real property in Entity 1 in exchange for money from the sale of other real property; however, there would still be taxable gain to Entity 1 because Entity 1 sold an interest (not to mention issues relating to “related parties”).  In the end, it’s the same result and the tax man must be paid.

@Trevor Larsen

In order to pay down a mortgage, you need money first. There's no such thing as "money from a 1031 exchange." 

When an exchange is completed, you parted with one property and acquired another. No money ever touched your hands. Whatever money you ended up with after an exchange will be taxable, which defeats the purpose of an exchange.

Also, it's not necessarily a good long-term objective to increase cash flow by getting rid of mortgages, unless they have bad terms. Good mortgages is how you leverage and grow your wealth.

@Trevor Larsen  , Unfortunately you can't use the replacement side of a 1031 to pay down mortgages on existing property.  That would work pretty slick.  But only new purchases of actual investment property qualify as replacement properties in a 1031 exchange.  

What you can do is use your equity creatively to restructure debt so give you better cash flow.  Complete the 1031 and then look at your debt profile, property performance, and ROIs for all.   Maybe a strategic refi is in order after the fact.