A 1031 exchange puts your next purchase on a fixed clock. A DSCR loan can finance the replacement property on its rent, without tax returns, which helps when the deadline is close.
In short: Yes, a DSCR loan can finance the replacement property in a 1031 exchange. LendingStreet's DSCR programs qualify on the property's rent, allow LLC borrowers and offer up to 80% LTV on purchases, so you can combine your exchange funds with new financing. The exchange itself is handled by your qualified intermediary and governed by tax rules, so confirm the structure with your tax advisor. Our part is to finance the purchase on a schedule that fits your deadlines.
LendingStreet is an investment property financing company. We do not give tax or legal advice, and nothing on this page tells you how an exchange will be taxed. Talk to your tax advisor and qualified intermediary before you sell, because many exchange decisions must be made before the first closing.
What follows explains how the financing fits around the exchange, in general terms.
The widely known 1031 deadlines are 45 days from the sale of your relinquished property to identify replacement properties in writing, and 180 days from that sale to close on the replacement. The two periods run at the same time, not back to back. In some cases the 180-day window can be cut short by your tax filing date, so ask your tax advisor.
These deadlines are generally not extended because a loan is running late. That is why the financing plan should start before you identify, not after.
| Stage | What happens | Financing step |
|---|---|---|
| Before the sale | Hire a qualified intermediary; plan the exchange | Share your scenario; get options on likely targets |
| Day 0 | Relinquished property closes; funds go to the QI | Have entity documents and statements ready |
| By day 45 | Identify replacement properties in writing | Apply on your top choice; order appraisal |
| By day 180 | Close on the replacement | Close the DSCR loan; QI wires exchange funds |
On a DSCR loan, the usual timing variables are the appraisal, title, insurance and HOA or condo documents. Any of them can stall a file near a hard deadline. Starting early, choosing a property with clean title and getting insurance quotes right away all help.
Because DSCR qualifies on the property's rent, there is no wait for tax returns or income verification. If a property needs work before it can be rented, or the timeline is extremely tight, a bridge loan can often close faster, with a refinance into a DSCR loan later.
Tax advisors often describe a general rule of thumb: to defer all of the gain, buy replacement property of equal or greater value, reinvest all the net proceeds, and replace any debt paid off on the sale with new debt or added cash. How that applies to you is a question for your tax advisor.
From a financing view, this is often why investors use a DSCR loan in an exchange. The loan can be sized so the new debt is at least as large as the debt that was paid off, while the exchange funds cover the down payment.
This example is illustrative and not a quote. An investor sells a rental for $500,000. After sample selling costs of $30,000 and a $200,000 mortgage payoff, about $270,000 goes to the qualified intermediary.
The investor buys a $750,000 fourplex as the replacement. The $270,000 in exchange funds is the down payment, so the DSCR loan is $480,000, or 64% LTV. The investor covers sample closing costs of $15,000 separately.
At a sample rate of 7.0% on 30-year amortization, principal and interest is about $3,193. With $1,100 a month for taxes and insurance, the full payment is about $4,293. With total rent of $5,200, DSCR is about 1.21x. The new debt of $480,000 is larger than the $200,000 paid off. Whether this structure meets the exchange rules is for the investor's tax advisor to confirm.
The qualified intermediary holds your sale proceeds and sends them to the closing on your replacement property. Your title company, the QI and our financing team will need to coordinate on a few items.
Have the relinquished property's settlement statement, the exchange agreement and QI contact, your identification letter, entity documents if buying in an LLC, bank statements for reserves, and the replacement's purchase contract and any leases. Send us your scenario before you identify, and our financing team will come back with 2–3 options on the properties you are considering.
Yes. A DSCR loan can finance the replacement property, with your exchange funds as the down payment. Your qualified intermediary and tax advisor handle the exchange itself.
No. The 45-day and 180-day deadlines come from the tax rules, not the lender, and are generally not extended for financing delays. Start the loan process early.
DSCR loans allow LLC borrowers, but exchange rules generally require the buyer to line up with the seller of the relinquished property. Confirm the vesting with your QI and tax advisor before applying.
Tax advisors often say paid-off debt should be replaced with new debt or added cash to defer all of the gain. How that applies to your exchange is a question for your tax advisor.
Usually not. Funds held by the qualified intermediary are generally committed to the purchase. Plan to show separate funds for reserves.
Many investors identify backups. Share all identified properties with us so our financing team can review each and move quickly on whichever one you pursue.
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