Paying Off a Mortgage with 1031 Exchange Funds

1031 Exchange Funds

Can a taxpayer do a 1031 exchange of real estate and use the sales proceeds to pay down or pay off a current investment property mortgage?

1031 Rule Number 1

First and foremost, in a 1031 exchange the taxpayer conducting the transaction needs to relinquish an old property and receive a new like-kind replacement property. If the taxpayer uses the proceeds from the disposition of the old relinquished property for anything other than the purchase of new replacement property then the exchange may fail.

Paying Off Debt

Paying off debt on land that you already own is not (in the eyes of the IRS) a valid use of the exchange funds. They do not view the receipt of this debt relief as being a replacement property. Bottom line, you need to move your exchange proceeds into your new property. Using these funds for any other purpose - such as paying off a mortgage - will jeopardize your 1031 exchange.

  • 1031 Hotline: If you have questions about 1031 exchange funds, feel free to call me at 612-643-1031.

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