1031 exchanges can be complex and many taxpayers have questions about specific like-kind exchange situations. It’s important to get answers to these questions from a qualified intermediary before starting your exchange so you can ensure your 1031 exchange will be a success.
Consider the following 1031 exchange situation / question:
We are entertaining the idea of selling our two rental properties. In the event we’d prefer to use this for hard money lending, is it possible to avoid capital gains with a 1031 exchange? Our thought would be to roll the proceeds into a hard money lending platform where we would invest smaller amounts that would be pooled with other lenders in multiple different projects around the county. Does that meet the criteria for deferring capital gains in a 1031 exchange?
1031 Exchange Rules
Unfortunately, no. You cannot do a 1031 exchange from real estate into a creditor’s position in a hard money loan. You have to exchange into like-kind replacement real property, NOT a note or other evidence of indebtedness (which is not qualifying replacement property).