Can I use a 1031 exchange to pay down principal in a rental home I already own from the profits of another rental home that does not meet the 2/5 exclusion?

[TomYoung]

If you receive cash ("boot") in a 1031 exchange the exchange will be partially taxable to you.  Having paid tax on the cash there's certainly no restrictions on how you use the cash: by a boat, a car, a diamond ring, pay down a mortgage on a different property or anything else.

[mcosmo13]

Hi Tom, I meant does the paying down principal count as a “like-kind exchange”? More specifically, would it defer capital gains tax per the 1031 code? It’s my understanding that I can’t use the 1031 exchange to defer capital gains if I use rental property profits to buy anything other than a rental property within 1 year of sale.

My overall line of questioning is, if the profits do tax defer, and that 2nd rental property was once my primary residence in which I lived in for at least 2 of the last 5 years, can I defer capital gains completely on the 1st property if I pay down principal on, then sell, the 2nd property?

[Critter]

 Nice thought but No it does not qualify ... it must be a new property for the exchange not one you already own.  

[Critter]

And a proper 1031 exchange requires the money from the sale be kept by a third party in trust until you buy another qualifying  property... you cannot use it to do anything in the meantime ... you cannot touch it at all.  

[mcosmo13]

Ah that makes sense, thanks!

[Anonymous]

your understanding of 1031 is inaccurate. if you do a 1031 and want to avoid tax on all gain not only must you not touch the cash but the replacement property must be identified in a written document on or before 45 days after the transfer (sale of the old property) and must be received (purchase of replacement property) within 180 days after the transfer or by the due date including extensions of the tax return for the year of transfer, if earlier.

failure to meet either time limit bars 1031 treatment.