Selling rental properties

[thorxes]

Had a quick question about selling rental properties.

I'm aware of using a 1031 exchange to reinvest capital/profit from rental properties into new rental properties to avoid taxes. However the timing and restrictions of the 1031 exchange might not work well in my situation.

I own 3 properties and have a sales agreement on 1 - scheduled to close in July. One of the 2 unsold properties still has a mortgage - does anyone know if I can use the profit/capital from the one being sold in July to pay off the mortgage on the one with the mortgage to avoid paying taxes?

In essence would this be a way to just move my capital within my current investments?

[Business Attorney]

No. The rules on deferred exchanges under Section 1031 are long and detailed and perhaps confusing but they are clear that you have to use the funds to acquire a NEW property. You can't just pay off debt on a property that you already own.

[thorxes]

Thanks for the info! Guess I'll have to eat it and shoot for reinvestment through a 1031 on the sale of the other 2 properties.

Can I do the 1031 exchange to purchase a new property that I plan to live in and rent out part of it?

[Business Attorney]

Yes, but you have to allocate the purchase price between the portion held for personal use and the portion held for business use. The portion of the investment in property that is held for personal use does not qualify for the Section 1031 treatment.

You should consult a tax advisor to make sure that it is done properly.