Uses of Loan Proceeds from 1031 Exchange

[Ryan Metcalf]

I am interested in buying a 2 unit commercial property with an SBA loan.  I have 1031 Exchange money and my own cash to fund this.  In the larger unit I want to open a business and I will lease the smaller unit.  Both units will require construction so the units can be converted to retail spaces.  The business I want to open will need working capital from the SBA loan for first year business expenses.  Can I use 1031 Exchange money to help fund all of this (purchase, construction, business expenses / working capital)?

Thank you!

[Dave Foster]

@Account Closed, Technically 1031 money cannot be used for anything other than the purchase of the real estate itself.  SBA financing is a quirky animal.  A 504 loan isn't such an issue because it is only for the real estate itself. But a 7a loan gets weird because it lumps in FFE and working capital into the loan itself.  In the regular world this would not be allowed in a 1031.  

But in this case it's one branch of the govt requiring something that another branch of the govt prohibits - BUSINESS AS USUAL!!!!

Your QI is going to have a big say in whether they will let the transaction conclude.  But your accountant will decide whether or not they can report numbers with enough confidence to let you reap the full benefit of the 1031.  Usually the only way this will work is if the allocation to the actual real estate is greater than your net sale and the down payment on the real estate portion eats up your entire proceeds.  In that event it becomes relatively straightforward to allocate your 1031 to the real estate and the rest to the other stuff.