1031 Exchange Debt Rules: What Does it Mean to “Replace Debt” in a 1031 Exchange?

A large commercial building governed by 1031 exchange debt rules

By Alex Madden, Vice President, Kay Properties & Investments

Facts About 1031 Exchanges

If you are an investor and you sell a property whose value has increased, you will have to pay certain types of taxes. For instance, you will have to pay federal and state capital gain taxes. If the original seller of the property had claimed depreciation expenses, you will be required to pay depreciation recapture taxes. You can defer these taxes if you do a 1031 exchange. Below are more details on 1031 exchanges.

How to Do a 1031 Exchange?

A 1031 exchange got its name from the code section 1031 of the IRS. It involves swapping properties held for investment or business purposes. The properties being swapped should be of the same class, nature, or character.

When Not to Do a 1031 Exchange

Although doing a 1031 exchange may offer you many benefits, it is always not the best thing to do. For instance, you should not do it if:

  • Your tax liability is a bit tolerable
  • You are unable to find a suitable property that will replace your property
  • You are not eligible for a 1031 exchange

When Should You Do a 1031 Exchange

You should do a 1031 exchange if you can afford and are willing to keep your capital illiquid. In simple words, you should do a 1031 exchange if you are not planning to transition your capital to another investment vehicle. For instance, you can do this exchange if you own a building and want to buy more buildings. However, before you do a 1031 exchange, you should first understand your investment goals.

About Kay Properties and www.kpi1031.com

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 21 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 2093 Philadelphia Pike Suite 4196 Claymont, DE 19703.

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