Does a 1031 require new debit?

[Jennifer Niez]

Does a 1031 exchange require new debit or can the up leg be purchased with exchange money and supplemented with cash? If new debt is required, can a seller carry or private money be used?

Thanks in advance for any insight you may be able to share!

[Dave Foster]

@Jennifer Niez, @Caleb Heimsoth  have I got good news for you!! 

You do not have to keep the same amount of debt.  You must do two things in order to defer all tax - First use all of the cash proceeds and second purchase at least a much as you sell.  

If you do these two things that will generally require new debt on the new property because folks don't have the cash to supplement.  But if you do then it's absolutely acceptable for you to access cash from any other source.  The IRS does not care whether it is a conventional loan, private loan, gift from a friend, sale of stock, savings, robbing your child's piggy bank or wherever you have access to money.  As long as at the end of the exchange you purchased at least as much as your net sale and as long as you used all of your cash proceeds in the purchase you will defer all tax.

Supplementing with cash to eliminate debt is a very sound late market strategy when interest rates start to climb. Replacing a 1031 with high interest money may not let your NOI work for you. But going to cash keeps your NOI and gives you a risk hedge against a down turn. Another common method our investors use is to sell one property with lots of gain and little equity and 1031 that one. They will sell another property with little profit and lots of equity without a 1031 and use the proceeds to pay down the debt on the 1031 property to gain accomplish a lift in NOI and a drop in mortgage risk.