What is a 1031 exchange?
A 1031 exchange, named for the section of the Internal Revenue Code that allows it, lets a real estate investor sell an investment property and buy another without paying capital gains tax at the time of the sale. The gain is deferred into the replacement property, and the deferral continues for as long as the investor keeps exchanging.
The rules are strict, which is why the financing matters. The proceeds of the sale never touch the investor’s hands; a qualified intermediary holds them. From the day the relinquished property closes, the investor has 45 days to identify replacement property in writing and 180 days to close on it. The replacement must be of equal or greater value, and all of the exchange proceeds must be reinvested, or the difference is taxed. Miss a deadline and the entire gain becomes taxable in the year of the sale.
There are three common forms. In a forward exchange the investor sells first and buys second, which is the standard case. In a reverse exchange the investor buys the replacement first and sells afterwards, using an exchange accommodation titleholder to hold one of the properties. In an improvement exchange the exchange proceeds fund construction on the replacement property inside the 180-day window. Each form creates a moment when the investor needs capital faster than a bank will move.
How investors use hard money to execute a 1031 exchange
The 180-day clock is the whole story. A conventional lender takes 45 to 60 days on a good file and longer on a commercial one, and the file is not good when the borrower is mid-exchange: two properties, an intermediary, a deadline and a seller who has other offers. A hard money bridge removes the timing risk.
Closing the replacement on time. The most common use is simple. The investor has identified the replacement property, the exchange proceeds cover part of the price and a bridge loan covers the rest, so the purchase closes inside the window. Loan Goat’s bridge loan publishes closings in 3 to 14 days and up to 75% LTV on residential or 70% on commercial, with no prepayment penalties, so the loan can be replaced by a permanent mortgage whenever the borrower is ready.
Buying before selling. In a reverse exchange the investor wants a replacement property before the relinquished property has sold, either because the replacement is a rare asset or because the sale is dragging. The bridge funds the purchase now; the sale proceeds retire the bridge when they arrive. Because the investor already owns the relinquished property, the bridge can be cross-collateralized against it, which is how a larger purchase is carried with less cash. Cross collateralization is the published structure of the blanket and cross-collateral program.
Bridging a bank fallout. A lender that withdraws or retrades on day 150 of an exchange is not an inconvenience, it is a tax bill. A hard money bridge closes the purchase on the original date and the bank loan is replaced afterwards, at leisure.
Improvement exchanges. Where the plan is to build or renovate with the exchange proceeds, the bridge funds the acquisition and the construction draws while the intermediary’s structure runs, and the finished property refinances into a term loan.
In every case the loan is underwritten on the property, the equity and the exit, which is why Loan Goat can decide quickly. The bridge loans program carries the forward exchange; the blanket and cross-collateral loans program describes the structure a reverse exchange often needs. Send the identification letter, the purchase contract and the closing date with the first message.
1031 exchange loans
The forward exchange bridge is the standard product: a first lien on the replacement property, sized against the purchase price, with the exchange proceeds as the borrower’s equity. Loan Goat’s bridge loan publishes terms of one or two years, LTV up to 75% on residential and 70% on commercial, loans from $150,000 to $25,000,000 and rates from 9.00% to 13.00%, on SFR, condo or townhome and 2-4 unit property, with no borrower experience required. Larger or commercial replacement properties across multifamily, mixed-use, industrial, retail and office run on the same program, at up to 70% LTV on commercial. Points, fees and the rate on a specific file are quoted on the Letter of Intent.
Reverse 1031 exchange
The reverse exchange bridge is the same loan with one more piece of collateral. Because the relinquished property is still owned when the replacement is bought, the lender can take a lien on both, which raises the total equity in the structure and lowers the cash the investor has to bring. When the relinquished property sells, its proceeds pay the bridge down or off, and the replacement property refinances into a term loan or is held on the bridge until it does. The term and the loan amount on a reverse exchange follow the cards above; what the cross-collateral adds is the ability to close the purchase without waiting for the sale. Whether a specific pair of properties supports the structure is confirmed per deal.
Timing, documents and the exit
Three habits make an exchange close cleanly with a bridge.
- Get the bridge approved before the 45-day letter. Identification is easier when the financing is already in place, and the 180-day clock stops feeling short.
- Introduce the intermediary early. The qualified intermediary, escrow and the lender need to agree on how the exchange funds and the loan proceeds arrive at closing. One call on day one saves a week at the end.
- Write the exit into the plan. A 1031 bridge is repaid by a sale (reverse exchange), by a permanent loan on the replacement property, or by a Loan Goat term product such as the rental DSCR loan for a residential rental or the multifamily term loan for an apartment building.
The documents are the ones every bridge asks for: the application, a schedule of real estate owned, proof of funds for the equity beyond the exchange proceeds, the purchase contract, the intermediary’s exchange agreement and the closing statement of the relinquished property. On a reverse exchange, add the title and payoff on the property being sold.
Where a 1031 bridge fits
- Bridge loans for the forward exchange and the bank-fallout rescue.
- Blanket and cross-collateral loans for the reverse exchange structure.
- Multi-family hard money loans when the replacement property is an apartment building.
- Cash offers only when the replacement property is listed for cash buyers.
A 1031 exchange rewards the investor who treats the calendar as a hard constraint and the financing as a solved problem. Loan Goat’s bridge is built for exactly that.
