Last week as you read about the necessity of adhering to the debt replacement principle when completing a 1031 exchange, you may have had one important question running through your mind: “Can I obtain debt to meet my 1031 exchange requirements if I invest in a Delaware Statutory Trust (DST)?”

“Why do I owe taxes on the property I sold when I completed a 1031 exchange with the purchase of a new property?” This is a question that is far too common by 1031 exchangers. The usual answer is Boot.

What Is a Bridge Loan?

In an ideal setting, an investor can use the funds from the sale of one property to pay for the purchase of a second one. There might come a time when the gap between sales is large enough that an investor can't immediately use the proceeds from the sale of Property A to cover the cost of purchasing Property B. In that case, they need funding to "bridge" the gap. Enter bridge lending, also called bridge funding, bridge financing or a bridge loan.

People can use bridge loans when they are buying and selling properties for personal use. A business or professional investor can also use a bridge fund to cover a gap in funding.

1031 Exchange Requirements

1031 exchanges can be an opportunity for investors to defer the tax consequences that come from the sale of a property. However, there are certain requirements that must be met in order for 1031 exchanges to be considered valid by the IRS. These requirements include the following:

Marcus decided it was time to increase his investment potential. He planned to sell the 2-bedroom condo he had been renting to tenants for ten years and purchase a triplex or fourplex through a 1031 exchange. In compliance with 1031 exchange regulations, he engaged a qualified intermediary (“QI”) to handle the funds of the condo and the eventual acquisition of the replacement property.