1031 into another property we own by paying off promissory note?

[Steve K.]

Just read another post that got me thinking... didn’t want to hijack her post so starting a new one: We’re looking to sell a Quadplex later this year and expect to have some capital gains. We own another similar quad down the street, with seller financing in place which has a balloon payment coming due. We were thinking of using the proceeds from the sale to pay off the other building. Would we be able to 1031 profits from the sale into the other quad? We hold title with a promissory note held by the previous owner.

[Dave Foster]

@Steve K., Happy to chime in. Unfortunately the 1031 must be a sale of real estate and a purchase of actual real estate.  You can't use the 1031 to pay down a mortgage on property you all ready own.

But a possibility if you still wanted to sell the first quad would be to sell and 1031 and purchase a different property or properties for your 1031.  Then once the 1031 in complete do a cash out refinance and use the refinance proceeds to pay off the balloon.

Otherwise you'll just have to pay the tax on the sale if you want to use sales proceeds to pay off the balloon.