Clients sometimes inquire if they can use the balance of their 1031 funds to pay down the mortgage or debt on replacement property that they have already closed on and purchased as part of their 1031.
Can you Pay Down Debt on Already Acquired Property?
This question usually comes up when people have identified multiple Replacement Properties because they planned to buy a few Replacement Properties, and they have now expended some (but not all) of their 1031 funds on the purchase of the first Replacement Property, only to discover that the remaining Replacement Property(ies) are not suitable or cannot be closed on within the 180 day exchange period.
This prompts the following question: can you go back and pay-down the debt on the already acquired Replacement Property in order to get all of your 1031 funds used-up as part of the 1031 exchange?
Many tax commentators and attorneys think this will not work, and the extra money applied to the debt pay-down will be treated as taxable boot by the IRS. This is because the IRS takes the position that paying down debt on property that is already owned by a taxpayer is not an exchange...even if it is done within the 180 day exchange period. The idea is that the exchange on the already acquired Replacement Property is completed and done.
Start Your Exchange: If you have questions about paying down debt on Minnesota property that you already own, reverse exchanges or planning for 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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