10-31 mortgaged property for multiple paid in full properties?

Question

So can I:

1) Sell a paid off rental property and 10-31 exchange it for two mortgaged properties so long as their aggregate value does not exceed 200% of the relinquished property?

2) Sell a mortgaged rental property and 10-31 exchange it for one or more paid off properties so long as the aggregate value does not exceed 200% of the relinquished property?

3) Sell a mortgaged rental property and 10-31 exchange it for a mix of paid off and mortgaged properties so long as the aggregate value does not exceed 200% of the relinquished property?

Dave Foster · Answer

@Jack B.  you do not have to trade a mortgaged property for another mortgaged property as long as you purchase at least as much as you sell and you use all of your proceeds to do so.

• CFR › Title 26 › Chapter I › Subchapter A › Part 1 › Section 1.1031(k)-1  Treatment of deferred exchanges.

Plenty of examples there.

Jack B. · Answer

Actually the 200% rule doesn't confuse me, as you will note in my OP I already knew the 200% rule, and I also know the 45 day/180 day rules, etc. My question was whether I had to exchange property that has a mortgage for a property that also has a mortgage and the same for paid off property and a mix and match scenario.

You wouldn't in reality have to buy with a mortgage if you already have one. I can sell a mortgaged property here in Seattle and buy another house paid in full also here, within a 20 minute drive. In my situation, I'm actually considering exchanging for property in the Tampa Bay/Lakeland Florida area, where just one of my houses here would buy 3 four plexes there.

The confusing thing is I read that you can't trade a mortgaged property for a paid in full property, that it had to have a mortgage as well, on at least one of the blogs about 10-31 exchanges some time ago and wanted to see if anyone else has any other credible information. Do you have a source for your info that specifically states that you can trade a mortgaged property for a paid in full one and vice versa? I've read a few FAQ's on some of the broker sites and they have conflicting info. The only thing anyone seems to agree on is the 3 property/200%/95% rules...But that's just the usual info already readily available on every site on this stuff. Few people seem to know the detailed rules or have any credible sources discussing this scenario. I'll see if I can find one of the places I read this.

Dave Foster · Answer

@Jack B., To simplify, you must do two things valuation wise.  First you must purchase at least as much as your net sale (contract price less closing costs but before mortgage payoff).  Second, you must use all of the net proceeds in the next purchase or purchases.  If you sell a property for 330K with 30K of closing costs and a 100K mortgage you would need to purchase at least 300K in investment real estate and use all 200K in proceeds to do that if you want to defer all tax.

You can purchase one 300K property using the 200K as down payment.  You could purchase two 300K properties with 100K down on each one.  You could purchase one 200K property for cash and buy one 100K property with 100% owner financing.  In every case you bought at least as much as you sold and you used all of the proceeds.

If you sold for 300K and had no debt you could buy one 300K property for cash.  You could buy two 300K properties with 150K down on each.  You could buy 3 500K properties with 100K down on each.  etc etc....

The reality is that if you have a mortgage on your relinquished property you will probably have to replace that mortgage somewhere in your replacement property.  But that is not a requirement if you had cash that you wanted to add to the mix.

Keep it simple by just telling yourself that you must purchase at least as much as your net sale and you must use all of the proceeds in the purchases.

The 200% rule that is confusing you only has to do with the identification of potential properties.  It is not an issue if you are purchasing 3 or fewer replacements.

Jack B. · Answer

So you're saying I can sell a mortgaged property but I must buy mortgaged properties with the proceeds? Yet for #3 you say I can mix and match?

Dave Foster · Answer

Hey @Jack B.

The 200% rule is really about identification of potential replacement properties.  The rule is that if you name 3 or fewer properties as potential replacements, close on one or all of them and their aggregate value does not matter.

However, if you want to name more than 3 potential replacements their total value can be no more than 200% of the value of what you sell.

If you want to name more than 3 potentials and their value must be more than 200% of what you sold then you can still do it as long as you close on at least 95% of the value of your potential acquisition list.

The other thing you need to pay attention to valuation wise is that in order to completely defer all tax you must purchase at least as much as you sell and you must use all of the proceeds in the next purchase or purchases.  If you buy less than you sell, or if you take cash out as boot from the closing you will pay tax on the difference.

So here's specific answers

1. You can sell one and buy more than one.  The 200% only comes into play if you name more than 3 potentials and don't close on all of them.  What is important is that you purchase at least as much as you sell.

2. Yes, (same answer about the 200%).  In this instance the replacements are going to necessitate that you either take out a new loan or loans to replace the mortgage or bring cash to the table so you can still purchase at least as much as you sell.

3. Yes mix and match as you want.  Just make sure you purchase at least as much as you sell and use all of the proceeds.  Again, the 200% rule only comes into play if you name more than three potential replacements and don't close on 95% of their aggregate value.