These TIC purchases often require commercial bank lending. For a 100% tax deferred exchange, the exchanger needs to make sure that all of the net proceeds from the sale of their old property are utilized for the TIC purchase. Additionally, any mortgage debt paid off from the sale of their old property must be replaced. Many of the commercial lenders for these TIC purchases require the bank lending be made to a Delaware LLC entity. This creates the requirement for the 1031 exchanger to have a single member LLC for each party of the exchange.
Check out the following lending issues prior to your 1031 exchange transaction:
1. Clean up the old property title by transferring it to your individual name. Mortgage portfolio lenders will not lend to living trusts, revocable trusts, partnerships, or limited liability companies. Remember that the IRS considers a single owner trust, a single member limited liability company or a husband and wife owned partnership as a disregarded entity. This means that you can transfer ownership back and forth with no federal tax effects and still obtain the mortgage lending. Be sure to check that you do not trigger a “due on sale clause” in your mortgage note when transferring such ownership back and forth.
2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.
3. If proceeds from a mortgage loan cause an exchanger to receive cash at closing of the replacement property, the exchanger will incur a tax liability. Instead request to have your earnest money refunded or apply the excess as a principal reduction payment on the settlement statement to avoid capital gains tax.
4. When participating in a reverse exchange do not utilize a residential mortgage lender who sells their loans to other investors. Only commercial banks will lend to a Limited Liability Company (LLC) which acts as the parking entity for a qualified intermediary.
7. Be careful when you refinance to take money out of your old investment property. An exchanger should not obtain cash out refinance on their old property immediately before their 1031 exchange transaction. The IRS will not allow the