1031 Case Study: Bank Rules & 1031 Exchange Protocol

1031 Exchange Condo

Recently, a client came to us with the following 1031 exchange scenario. The client was looking to do a like-kind exchange on their condo. After crossing their t’s and dotting their i’s with 1031 exchange protocol, they discovered that the rules for 1031 did not coincide with the banking protocol.

The Importance of Qualified Purpose

In order to qualify for 1031 treatment, the client would have to rent the condo out for two years in order to satisfy the qualified purpose requirement. This did not gel with the banking protocol. The bank would not allow a regular loan if the client was to rent out their newly purchased property. This means that in order to qualify for 1031, the client must change it to an investment loan, have a different type of appraisal done, and acquire a higher interest rate for this new type of loan - all which is more than likely add time to the approaching 1031 deadline. 

Preparing for Your 1031 Exchange

The replacement property must be held for a qualified purpose of investment or business use; that may or may not necessitate an investment loan. To some degree the lender may be able to underwrite it as a regular loan. This is why it’s always a good idea to prepare for your 1031 exchange as early as possible to ensure it complies with all parties involved.

  • 1031 Hotline: If you have questions about bank rules and 1031 exchanges, feel free to call me at 612-643-1031.

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