Can I use a bridge or hard-money loan to close the replacement in time?

Short-term debt on the replacement counts as replacement debt

Section 1031(d) treats a liability the buyer takes off your hands as money you received. Reg. section 1.1031(d)-2 then nets the two sides: in its second example, the debt relieved on the property given up 'is offset by consideration given in the form of a receipt of property subject to' a liability, and also by cash paid.

Nothing in that netting asks about the loan's term, rate or lender. A 12-month interest-only note from a private lender is a liability on the replacement just as a bank mortgage is, and the Form 8824 instructions count 'any liabilities you assumed' when working out the net debt relief on line 15.

The basic rule for matching your old mortgage is in should I replace the mortgage or add cash. The point here is narrower: speed of funding does not change the arithmetic.

Two limits: the exchange funds cannot be collateral, and the deadline does not move

The exchange agreement must bar you from any right 'to receive, pledge, borrow, or otherwise obtain the benefits of' the money the intermediary holds, under Reg. section 1.1031(k)-1(g)(6). A bridge lender that wants an assignment of the exchange account, or a promise to repay from it, is asking for exactly that. The collateral has to be the replacement itself or other property you own.

The loan also buys no time. Section 1031(a)(3) requires the replacement to be received within 180 days of the sale or by your return due date, including extensions, if that comes first. The bridge loan is a way to close inside that window when the permanent lender cannot, not a way to stretch it.

Fees deserve a look. Origination points, lender legal fees and interest reserves on a short-term loan are loan costs, and paying them from exchange funds is generally treated as taking cash; see are loan fees and points paid from exchange funds boot. Bring outside cash for them if you can.

Worked example: a $1 million replacement funded with a $400,000 bridge

Hypothetical, round numbers, state tax ignored; run your own numbers with your CPA. You sold a rental for $1,000,000, paid off a $400,000 mortgage, and $600,000 sits with the intermediary. Your adjusted basis was $500,000 after $200,000 of depreciation. You contracted to buy a $1,000,000 replacement, and on day 160 your bank says its loan will not fund until day 200.

A private lender closes a $400,000 one-year loan on day 175. You received nothing in cash, the $400,000 relieved is offset by the $400,000 assumed, and nothing is recognized. Say the bridge costs two points ($8,000) plus three months of interest at a hypothetical 8% ($8,000) before the bank refinance pays it off: about $16,000, paid from your own pocket.

Without it, the exchange fails and the whole $500,000 gain is taxed. Using Topic 409, $200,000 of depreciation is taxed at up to 25% ($50,000) and, for a seller in the 20% bracket, the other $300,000 at 20% ($60,000). Add the 3.8% net investment income tax on $500,000 ($19,000) and the federal bill is about $129,000.

Refinancing out of the bridge is a separate step, so keep it separate

Once the exchange closes, the replacement is yours, and paying off the bridge with a permanent loan of the same size is an ordinary refinance. The regulations do not treat it as part of the exchange, because no money from the relinquished sale is involved.

A cash-out refinance is different in kind. Pulling equity out shortly after the exchange, especially if it was arranged before closing, invites the argument that you took cash from the deal by another route. The regulations do not set a safe waiting period, so plan the timing with your adviser; the trade-offs are in refinance timing around a 1031.

Keep the permanent loan's application, the bridge payoff letter and the closing statements together. If the IRS asks how your debt replaced the debt you shed, the file should show one loan replacing another at the same balance.

When a bridge is the wrong tool and a trust interest fits instead

Some exchangers need the bridge only because a direct purchase is too large for their cash. If you named a Delaware Statutory Trust on your identification list, a trust interest can absorb part of the proceeds and carries its share of the trust's own nonrecourse loan, with no personal underwriting; see does a DST's loan count as replacement debt and how quickly a DST can close.

That route only works if the trust was identified by day 45. Nothing can be added after that, which is why a trust listed as a backup is worth naming even when you expect to buy direct.