A 60-Day Financing Plan for the Replacement: Lender Checklist for Exchange Buyers

Sixty days is the planning window because a failed loan after day 45 can only be cured from the list

Reg. section 1.1031(k)-1(b)(2) gives you 45 days to identify and until the earlier of day 180 or your return due date to receive the property. Once the list is filed, a loan that collapses at day 150 leaves you only the other properties on it. Whether a lender delay can extend the deadline answers that directly: it cannot.

Plan for the loan to fund within about 60 days of contract and aim to close by day 120. That leaves time to replace a lender, renegotiate after a low appraisal, or close on the backup.

The 60 days start at contract, not at day 45. If you find the property in week two and sign in week three, the loan can fund before the identification period even ends, and any property you receive before day 45 is treated as identified under paragraph (c)(1).

Get pre-approved before you list, and size the loan to the debt you are paying off

Under Treas. Reg. section 1.1031(d)-2, liabilities you are relieved of on the sale are treated as money received. IRS Publication 544 lets you reduce that amount by liabilities you take on and by cash you pay, but cash you take out cannot be offset by new debt. So the loan amount is a tax number as well as a credit number.

Hypothetical, round numbers: you sell for $1,500,000, pay off a $600,000 mortgage and send $900,000 to the QI. To defer fully you buy at least $1,500,000 and carry at least $600,000 of new debt, or add your own cash for any shortfall. If the lender caps the loan at $500,000, the $1,500,000 purchase needs $1,000,000 of equity: the $900,000 from the QI plus $100,000 of your own cash, and that added cash offsets the $100,000 of debt not replaced. If you instead buy a $1,400,000 property with the $500,000 loan and no added cash, both value and debt fall $100,000 short and $100,000 is taxable as boot. Run your own numbers with your CPA.

The exchange equation sets out the value, equity and debt tests, and replace the mortgage or add cash explains when outside cash is the better choice. Give the lender your sale contract and expected closing statement at pre-approval, so the equity is documented before the clock starts.

Borrow in the same taxpayer that sold, even if the lender wants a new LLC

The replacement must be acquired by the taxpayer that transferred the relinquished property. Many commercial lenders want the borrower to be a newly formed single-member LLC. Under Treas. Reg. section 301.7701-3, an eligible entity with a single owner is disregarded as separate from its owner unless it elects otherwise, so an LLC owned only by you is still you for this purpose.

A multi-member LLC is a partnership by default, which is a different taxpayer. Adding a spouse or partner to the borrowing entity can change who acquired the property; see the same-taxpayer rule and adding a spouse to title before the lender's counsel drafts the documents.

Choose the loan type for speed and certainty, not just rate

Regulation Z's official commentary deems credit to acquire non-owner-occupied rental property to be business-purpose credit, which 12 CFR 1026.3(a) exempts. The consumer disclosure waiting periods do not govern these loans; the lender's own process sets the pace, and the commentary's own example shows that occupying the property for more than 14 days a year removes the deemed treatment.

Loans underwritten mainly on the property's rental income are often called DSCR loans; conventional loans are underwritten on your own income as well. Documentation, pricing and speed differ by lender, so ask each lender for a written timeline from application to funding, with dates for appraisal, underwriting and clear to close, and compare that to your calendar before comparing rates.

Ask whether the loan is recourse. In a DST the loan is held at the trust level and our cash out DST page describes that financing as non-recourse to investors.

The checklist: what the lender needs and when, from contract to funding

Put these on the same calendar as your identification and closing dates. Loan fees, points and lender reserves paid from exchange funds can produce boot; loan fees and points paid from exchange funds explains which items are treated that way.

• Before listing: pre-approval, entity decision, and a draft of the sale contract and expected closing statement.
• Contract day: application submitted, appraisal and third-party reports ordered, purchase contract assigned to the QI.
• Days 10 to 25: appraisal back; if low, renegotiate or add cash while the inspection window is still open.
• Days 25 to 45: underwriting conditions cleared; rate lock set to expire at least two weeks after the target closing and before the exchange deadline.
• Days 45 to 60: clear to close, closing statement reviewed by your CPA for debt and boot, QI funding instructions sent.

If the loan cannot fund in time, the backup has to replace the debt too

When financing fails late, you can still meet the value and debt tests with other identified property or with added cash. A cash out DST is designed to solve debt requirements with a small portion of the proceeds: operating income services the loan and investors receive no current distributions. It must be on your list by day 45, and it carries leverage and illiquidity risk. The day 45 to day 180 closing plan shows how to time the backup.