Bank ties two mortgages together and use sale of one to pay down other?

[Maggie Hamill]

We are a developer near Madison, WI.  We have conventional financing on our duplexes and looking to hold a few and unload a few. A new lender that we met with told us that if a bank somehow ties the mortgages together (don't remember the term he used), the bank can use the funds from the sale of one to pay down the mortgage on the other property. 

At first we thought of this as a bad idea because we wanted our proceeds from any sale to 1031. However, now we're looking at this as a potential strategy. Build two duplexes and hold one, sell the other. Proceeds from the sale pay down some of the mortgage on the first to cash flow better. Our question is can this be done tax-free? We will obviously consult our CPA but wanted to know if anyone has heard of this strategy. This would be different from a 1031 because we wouldn't be buying new or exchanging. Thanks in advance!

[Matt Devincenzo]

Blanket loan or cross collateralization are the terms you're looking for. But doing this is no different than building two units using two loans and then selling one...e.g. a sale is a sale and you pay taxes unless you utilized tax planning like a 1031 to defer those taxes.