Financing a 1031 replacement property

To defer all of your gain, the replacement has to cost at least what you netted from the sale, and the new loan plus any cash you add has to cover the loan you paid off. The financing has to close inside your 180 days, so it should start before day 45.

How much you need to borrow

Take the sale price, subtract selling costs, and that is the number to meet or beat. Then look at the debt. Say you sell for $2,000,000, pay $100,000 in costs and pay off a $700,000 loan. You walk into the exchange with $1,200,000 of equity held by your intermediary.

Replacement price	New loan	Cash you add	Boot
$1,900,000	$700,000	$0	None. Equity of $1,200,000 plus a $700,000 loan.
$1,900,000	$500,000	$200,000	None. Your cash replaces $200,000 of debt.
$1,700,000	$500,000	$0	$200,000 of mortgage boot, taxable.
$1,900,000	$900,000	$0	$200,000 of cash boot: the extra loan doesn't cover equity you keep.

That last row is the one that surprises people. Borrowing more than you need doesn't let you take equity out tax-free; the $200,000 left with the intermediary comes back to you as taxable cash. The calculator in exchange mode runs these numbers with your own figures.

The calendar problem

A commercial loan needs an appraisal, a property condition report, usually an environmental report, title and survey, and the lender's own underwriting. None of that can start until you know which property you're buying, and all of it has to finish before day 180, or before your tax return due date if that comes first. If you identify on day 44, you have about four and a half months left for everything.

So if you plan to borrow, talk to lenders before the sale closes, with the likely replacement types in mind, so the loan terms are known when the identification letter goes out. The deadline calculator gives you the dates to plan backward from.

DSTs and debt

If part of your replacement is a leveraged DST, the trust's loan is already in place. Your share of a leveraged DST's debt can count toward replacing the debt you paid off; the offering's tax opinion and your CPA should confirm how it counts for you. The DST filing tracker lists offerings from SEC Form D data.

Ask Janover Capital about financing your replacement property

Janover Capital LLC runs this site and arranges commercial-purpose loans through lenders. A person on its desk will reply. It is not a lender, and any loan depends on a lender's approval and terms.

Replacement price (estimate)

Loan amount you think you need

Property type

Replacement property state

Sale closing date (starts your 180 days)

Name

Phone (optional)

Business-purpose loans on commercial and multifamily (5+ unit) property only; no 1-4 unit or owner-occupied homes.

Questions people ask

Do I have to take on as much debt as I paid off?

Not exactly. To avoid mortgage boot, the debt on the replacement plus any new cash you add has to be at least the debt paid off at the sale. Adding your own cash works as well as borrowing; borrowing less and keeping the difference in cash does not.

Can I refinance the old property right before the exchange to pull cash out?

It is risky. A refinance shortly before a sale, done in anticipation of it, can be treated as taking cash out of the exchange. The facts matter, so talk to your tax adviser before you refinance anything you plan to sell.

Can the sale proceeds pay my loan costs on the replacement?

Exchange funds can pay ordinary closing costs on the replacement. Loan costs such as points and lender fees are generally treated as costs of the loan, not of the property, and paying them from exchange funds can create taxable boot. Ask your QI how they handle it before closing.