Yes, you can use a mortgage to buy the replacement property in a 1031 exchange, and most investors do. The key is that the financing has to fit the exchange's strict timeline and rules. Your sale proceeds go to a qualified intermediary, not to you. You generally have 45 days to identify replacement properties and 180 days to close. And to defer all of the tax, you usually need to buy a property of equal or greater value, reinvest all of your equity and replace the debt you paid off, either with a new loan or extra cash.
I'm Paul Mattos, a mortgage broker in Fort Mill, SC, licensed in North and South Carolina. I'm not a tax advisor, so I focus on the financing side of an exchange and work alongside your CPA and qualified intermediary. Here's how the loan fits in.
The 1031 Exchange Basics
A 1031 exchange, named after Section 1031 of the tax code, lets you sell an investment or business property and buy another one while deferring the capital gains tax you'd normally owe on the sale. Since 2018, it applies only to real property held for investment or business use, not your primary home or a vacation home you use personally.
The main rules most investors run into:
A qualified intermediary (QI) holds your sale proceeds. If you take the money yourself, even briefly, the exchange can fail.
45 days to identify. You generally have 45 days from the sale of your old property to identify possible replacement properties in writing.
180 days to close. You generally have 180 days from the sale, or until your tax return due date for that year if it's earlier, to close on the replacement.
The same taxpayer has to sell the old property and buy the new one.
The IRS explains the basics in Like-kind exchanges: real estate tax tips. Your CPA and QI should confirm the details for your situation.
How Financing Fits Into the Exchange
Replacing your debt
When you sell your old property, the mortgage on it gets paid off. To defer all of the tax, you usually need to take on at least as much debt on the replacement property, or make up the difference with additional cash. If you buy with less debt and don't add cash, the reduction can be treated as taxable "boot."
That's why most exchanges involve a new loan. A higher-priced replacement property, financed with a new mortgage, can let you reinvest all your equity and replace your old debt at the same time.
Using your exchange funds as the down payment
Your QI wires the exchange funds directly to the closing attorney for the replacement purchase. Your lender will usually need to see:
The exchange agreement with your QI
The settlement statement from the sale of your old property
Confirmation of the exchange funds held by the QI
Because the money goes from the QI to closing, you won't see it in your bank account. That's normal. Tell your lender up front that this is a 1031 exchange so they document the funds correctly.
Getting pre-approved before you sell
The 45-day and 180-day deadlines don't stop for underwriting. The best time to get pre-approved for the replacement loan is before you list or sell your old property. That way you know your price range, your loan options and roughly how long the loan will take before the clock starts.
Choosing a Loan for the Replacement Property
DSCR loans
DSCR loans qualify mainly on the replacement property's rental income, plus your credit and assets, instead of your personal income. They're popular for exchanges because:
You can usually close in an LLC, which can help if your old property was in one
Documentation is lighter, which can help on a tight timeline
There's no cap on the number of financed properties like there is with conventional loans
Most DSCR loans have prepayment penalties, so match the term to how long you plan to hold the property. See DSCR prepayment penalties explained and my DSCR loans page.
Conventional investment property loans
A conventional loan qualifies on your personal income and usually has to close in your personal name. It can work well if you have strong documented income and your old property was also in your name. See my investment property loans page.
Watch the "same taxpayer" rule
The entity that sells has to be the entity that buys. If your old property is in an LLC and your new loan has to close in your personal name, talk with your CPA and QI before you choose a loan. Some single-member LLCs are treated as the same taxpayer for exchange purposes, but get advice before you assume that. For how title and financing work with LLCs, see buying a rental in an LLC or your own name.
Common Financing Mistakes in a 1031 Exchange
Waiting until after the sale to get pre-approved. It eats into your 45 and 180 days.
Buying with less debt than you paid off without adding cash, which can create taxable boot.
Taking out a cash-out refinance right before or right after the exchange without tax advice. The timing can raise questions with the IRS.
Not telling your lender it's an exchange, which can delay documentation of your down payment.
Closing in the wrong name or entity, which can break the same-taxpayer rule.
Underestimating how long the appraisal and underwriting take on the replacement property, especially for multi-unit or short-term rentals.
A Simple Timeline
Before you list: Talk with your CPA, choose a QI and get pre-approved for the replacement loan.
At the sale: Proceeds go to the QI. Your 45-day and 180-day clocks start.
By day 45: Identify your replacement properties in writing with your QI.
Under contract: Send the contract, exchange agreement and settlement statement to your lender. Order the appraisal right away.
By day 180: Close on the replacement property, with the QI sending the exchange funds to closing.
Frequently Asked Questions
Can I get a mortgage on a 1031 exchange property?
Yes. Most exchanges use a new loan on the replacement property. Your exchange funds go toward the down payment and closing costs, and the lender documents them through your QI.
Do I have to replace my mortgage in a 1031 exchange?
To defer all of the tax, you generally need to take on equal or greater debt on the replacement property, or add cash to make up the difference. Ask your CPA how this applies to you.
Can I use a DSCR loan for a 1031 exchange?
Yes. DSCR loans are common in exchanges because they qualify mainly on the property's rent and can close in an LLC.
How long do I have to close in a 1031 exchange?
Generally 45 days to identify replacement properties and 180 days from the sale to close, or your tax return due date if it's earlier.
Can I do a cash-out refinance after a 1031 exchange?
Sometimes, but timing matters for tax purposes. Talk with your CPA before you refinance soon after an exchange.
Do I need a CPA for a 1031 exchange?
It's strongly recommended. A CPA and a qualified intermediary should guide the tax and exchange side, while your loan officer handles the financing. If you need a referral, see my list of trusted vendors, which includes CPAs I've worked with.
Let's Line Up Your Replacement Loan Early
If you're planning a 1031 exchange in North or South Carolina, I can get you pre-approved before you sell and compare DSCR and conventional options for the replacement property, so the financing is ready when the clock starts. As a mortgage broker, I compare investment loan options from multiple wholesale lenders. Schedule a consultation or start your application.
Paul Mattos
Mortgage Broker | Refine Mortgage
Carolina Home Financing
NMLS# 2339069 | Licensed in NC and SC
Call or text: 980-221-4959
Email: paulm@refinemortgage.net
Refine Mortgage Inc. | NMLS# 2417960 | Equal Housing Lender. This article provides general educational information and is not a commitment to lend, a rate quote, or tax or legal advice. 1031 exchange rules are complex, so consult a CPA and a qualified intermediary before you sell. Financing is subject to credit, income, assets, appraisal, title and underwriting requirements. Not all applicants will qualify.
