Why is it a good deal to have property paid off completely?
There are actually several reasons. When you retire, you can have a steady flow of income. You can also do Section 1031 tax-free exchanges. For example, suppose you own three houses fully paid for and you see an apartment building with eighteen units that you would rather have. You could then exchange your three houses for the apartment building and either get financing for the difference, or pay cash for the balance. If you have the savings, you wouldn't have to worry about whether the bank or mortgage company would extend the credit for an exchange or not. You could sell the three houses under a Section 1031 tax free
exchange. You have to make certain the real estate sale indicates that is actually a Section 1031 tax free exchange. Arrangements must be made to have the funding go through a neutral third party, such as an attorney, realtor, or other individual. The neutral party guarantees that the transaction (at least for his involvement therein) will qualify as a Section 1031 tax-free exchange for real estate.
If the IRS ever were able to strike it down and declare it did not qualify as a Section 1031 tax-free exchange, the neutral party in the transaction would be subject to legal action. In other words, you or whoever used his services could be sued the neutral third party if the tax-free exchange did not hold up under the scrutiny of the IRS. Real estate transactions like these can be a bit wacky. Thus it is easy to realize that the neutral third party must be very careful in these exchanges. It is also important to note that you must make sure that whomever you choose to be your third party player in a Section 1031 Tax-free exchange be the most qualified person available. After you have sold your three houses in a tax-free exchange, noted that it is actually a Section 1031 taxfree exchange, and the funding has gone to the neutral third party, you have 45 days to identify the property for which you are going to trade. You also "must receive the replacement property within 180 days (or if earlier, by the due date including extensions)," according to Code Section 1031 (a)(3); Regulation
1.1031(k)(-1).
These are the basic rules of a section 1031 tax-free exchange. There are many more rules that must be studied in this type of exchange to be sure of a legitimate and worthwhile financial decision is being made.
This is not legal or financial advice... it's just what I have learned throughout my real estate career.