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Using a Bridge Loan is Best Alternative to Fund a 1031 Exchange

Posted by Chad Mestler on Nov 21, 2017 3:01:37 PM

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Using an alternative bridge lender for financing 1031 exchanges often provides the best solution.  This type of financing gives the most certainty for closing on time and is well worth the extra interest and fees that may be charged, when compared with the high taxes that could be incurred otherwise. 

 

1031 Exchanges are one of the largest tax deferral methods utilized in the U.S. tax code

Part of being a great investor is understanding the ins and outs of investment property purchases and sales.  One of these areas is a 1031 exchange.  Generally speaking, when an investor sells investment real estate for a gain, capital gains tax is due in conjunction with the sale.  However, a 1031 real estate exchange, sometimes also known as a 1031x or a tax-deferred, like-kind exchange, offers investors the opportunity to defer the payment of this capital gains tax, under certain conditions, by exchanging, or purchasing, a like-kind replacement investment property.

Strict Deadlines

In order to qualify for this tax deferral with the IRS, strict deadlines must be met.  Typically, these timelines are 90 days for identification of the new property, and 120 days to close the purcjhase.  Failing to meet these deadlines could, and often does, result in large tax liabilities for the investor. 

In situations where the investor is paying cash for the "exchange" property, there usually isn't as much of a concern that the purchase will not close in time.  However, if the investor is relying on a loan to fund the closing, then traditional bank underwriting can often become a major risk factor.  The truth is that many banks and lenders do not have the ability to meet a tight funding deadline and their sluggishness can be fiscally dangerous to the investor when a 1031 exchange is in play.  

Using an Alterantive Bridge Lender

Using an alteranative bridge lender for financing 1031 exchanges often provides the best solution.  This type of financing gives the most certainty for closing on time and is well worth the extra interest and fees that may be charged, when compared with the high taxes that could be incurred otherwise. 

Another advantage to using an alternative bridge lender is that once the property is secured, and the tax deferrment guaranteed, the borrower can take additional time to prepare the property for financing and source the best long term loan product including a bank, CMBS or GSA loan.  In the long run, this strategy can often save the investor a lot of money and get them into a loan that will be a great fit for years to come.

To recap, here are several reasons to use a commercial bridge loan to finance a 1031X:

  • SPEED - better ability to meet tight funding deadlines
  • CERTAINTY - underwriting guidelines are more flexible and chances of closing are much more likely
  • TIMING - a commercial bridge lender helps to fill funding gaps and give the borrower time to prepare
  • TAX REPERCUSSIONS - Reverse exchanges often have a lot at stake, if not completed properly and on time

Check out a few CASE STUDIES.

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Topics: Brokers, 1031X, Insights