What happens to a 1031 exchange when the ability to secure a loan is restricted? There is only one real option. That is to infuse additional cash into the exchange. Additional cash offsets debt, but debt does not offset cash. Once the replacement property is purchased, establish an equity line of credit to pull out cash without triggering a tax also known as a post exchange refinance.
Reverse Exchange
Tough credit markets require additional planning. Perhaps the replacement property should be acquired through a 1031 reverse exchange. By purchasing the replacement property before selling the old or relinquished property, the outcome of tight credit will be mitigated rather than the alternative of a failed exchange because either the loan process exceeded the 180 calendar day time requirements or addtional cash was not available.
Installment Note
Another possible option is an installment loan, where the Exchangor carries the paper for the Buyer of their property. The key is to convert the note into cash to use towards the purchase of the replacement property. These are fairly rare and are accomplished by once again the infusion of additional cash to purchase the note from the Qualified Intermediary. The exchange proceeds as normal while the payments received from the buyer are no longer taxable in the year they are received.
Planning is the key to exploring the options before entering into the sales agreement for the old property. When considering selling an investment property call us (850.496.0090 or andgus@atlas1031.com) to discuss your options.