The agreement would outline how profits, losses, and ownership interests should be divided, which will guide how you allocate the gains.  

@Bradley Hendrix, You can allocate the proceeds any way you want, as long as you purchase at least as much as you sell for, and use all of the proceeds in the 1031 exchange.You could sell the apartment and purchase Two SFHs with a 1031 exchange. purchase one for cash and the second with debt.

The benefit here is two-fold: (a) it outlines all functions and components necessary to complete a site-built structure from the ground up; (b) you have a clear template for allocating responsibilities on rehabs.

You can allocate your proceeds any way you like. 

Since I have not yet obtained a private loan on a property and dont understand it's mechanics, I have a question on a specific scenario I have been playing with: If a private loan is obtained and the down payment is payed for using a cash advance on a business line of credit, could you then turn around and do a cash out refi with a conventional loan, and specifically allocate that money so that you can pay off the business credit money and a large chunk of the private loan?

(you can find how much suspended passive losses you currently have on your IRS Form 8582 - which your CPA is likely not giving to you and in that case you should get a new one)@Yonah Weiss when are you going to get my cost segs done :PWhat Lane mentioned here is IRS code (Sec. 469(g)(1)(A)): upon a taxable disposition of a passive activity, the taxpayer may use any remaining suspended passive activity gain allocated to that activity first against passive loss from the same activity, then against net passive loss from other passive activities, and then as a nonpassive income.In practicality, segregation most likely benefits the GP side (LP not so much) and becoming RE Pro is almost nonpractical (except in Airbnb-self managed case); the PAL offset route is much easier to implement. 

I absolutely collected first, last and security for my class-C rentals until NYS prohibited that practice back in 2019.Many tenants cannot manage their money properly, so this mitigates the issue of not being paid last month's rent when they need to move and the new landlord is receiving those funds they have allocated for their housing during the last month of their stay.This was also helpful to me to pre-screen who has their financial house in order and had saved for their moving costs as part of their planning.If I still could, I most definitely would - without exception.

It’s more about being able to reasonably justify the land allocation amount that you use.

Of course, you could get a bank loan and use the HELOC as a downpayment, but you need to be careful the property still cash flows with that much debt attached to it (or allocated to in the case of the HELOC).

I financed this deal through a private lender, allowing for a swift acquisition and the flexibility to allocate funds toward renovations.