Ted Stefan
North & Central Florida

Debt replacement with a 1031 Exchange can cause confusion with clients. I try and explain it as debt really just factors in a sale with how much cash you will get after the dust settles from closing. The IRS will not punish you for having a mortgage or loan that is paid off at close, but they also will not reward you. They still want you to buy at equal or greater to sale and reinvest all cash proceeds from the sale to fully defer. Having a loan on the sale however means you will not have all the cash available to satisfy the first requirement of buying equal or greater. Example: Scenario 1: Sell a property for $100K with no debt. 1031 requires you to buy $100K and reinvest all the cash. Scenario 2: Sell a property for $100K with a $50K mortgage. You will have $50K cash after the closing. The 1031 is simply saying you need to buy $100K worth or real estate, and utilize the $50K proceeds. If you attempt to buy something for $100K with only $50K cash, you will figure out a way to replace the debt because otherwise you cannot afford it. Debt can be replaced with 1) a new loan on the purchase, 2) outside cash, 3) combination of a new loan or outside cash.

We send an identification form directly to the exchanger. To fill out the identification form, you simply need to list property addresses. You do not have to be under contract or even have an offer out. The property you list does need to be site specific (i.e. listing an apartment, need to include apartment number, raw land a legal description or parcel number). How many can you list depends on a variety of factors. Most utilize the 3 property rule, which allows you to list 3 properties of any value. One can identify more than 3, but if more than 3 the total value cannot exceed 200% of the sale (called the 200% rule). You can break both the 3 property and the 200%, but will then fall under the catch all provision (95% exception) which states you must close on 95% of value listed on the ID form to have a proper 1031 Exchange.

There are many benefits to doing a 1031 Exchange. One significant benefit is the opportunity to fully utilize the value of cash today, so that you are able to grow your real estate portfolio quickly, and get a higher return on your investment. We have seen with these last few years the power of inflation, and I believe the old saying of “A dollar today is worth more than a dollar tomorrow” to hold true. The 1031 Exchange can be used to diversify portfolios (sell one, buy multiple), consolidate (sell multiple, buy one), used for estate planning purposes, use to buy in various regions across the US, and even sometimes to buy a future 2nd home/dream home to retire.

Give me a call on my direct line (629) 203-2725, email me at luke.hays@ipx1031.com, or use this online Start an Exchange form. I will reach out directly to go over any 1031 questions and talk about next steps.