Does 1031 exchange apply to hard money profit?

Question

Would a 1031 exchange be able to be used for money received back from a hard money loan? If not what would be the best way to reinvest so taxes would be minimal?

We invested in a property here in Hawaii 2 1/2 years ago with a group of investors, and since the process took such a long time we are receiving a 25% annualized cash on cash interest rate on our return by the end of the month.

I read up on the 1031 exchange to avoid paying taxes now on the return, but only was able to find that it applies if you sell a property. Any advice would be appreciated. Mahalo!

Ashish Acharya · Answer

No, you cannot. 1031s are used to defer (no avoid) the capital gain from the sale of real estate assets. Your income is an interest income and has to be mitigated via other tax-saving strategies.

Devin Troche · Answer

@Ashish Acharya

Thanks for clearing that up for me.

Devin Troche · Answer

@Devin Troche

Are there any strategies you know of that would apply? I am looking to invest return into possibly 2 rental properties.

Bill B. · Answer

You would have to have owned the property, sell the property and buy more property. It sounds Ike your income is going to be taxable. As regular income.  But you posted in the IRA forums. I don’t think you’d ever bother to do a 1031 in an ira as all withdrawals are taxed at your maximum rate, capital gains rates don’t apply.