Is it possible to 1031 a property and pay back rehab costs?

[Amanda Harding]

I rehabbed a 3 family using a mix of hard money and my own credit. I have been renting it out for the last year and was hoping to cash-out refi to pay back my investors and myself but my appraisal came back too low for me to pay back myself. I am considering selling but would like to 1031 exchange-- is it possible for me to pay myself back for the rehab costs I put on credit if the money isn't tied to a loan? 

[Bob Reinhard]

My experience with clients is that a 1031 is toward purchase price.
overage back to you at taxable rate at end of Transactional period.
Much success.

[Raj Sakthi]

Of course I am not a CPA or 1031 Intermediary. In my experience, IRS views anything other than purchase cost as outside of 1031 exchange boundary and will tax you accordingly. Best to consult a 1031 Intermediary for complete information. 

[Brad S.]

Quote from @Amanda Harding:

I rehabbed a 3 family using a mix of hard money and my own credit. I have been renting it out for the last year and was hoping to cash-out refi to pay back my investors and myself but my appraisal came back too low for me to pay back myself. I am considering selling but would like to 1031 exchange-- is it possible for me to pay myself back for the rehab costs I put on credit if the money isn't tied to a loan? 

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Sure it's possible, but that would be considered taxable "Boot."  In order to defer all the taxes, you need to utilize all the cash from the sale and not reduce your debt liabilities. So, if you net $100k on the sale and have $50k in equity, you should buy at least a $100k replacement property, with at least $50k down payment and $50k mortgage. The best way to do what you are thinking, is to complete the 1031 and then refinance the cashout after. Then it is just a loan, and not taxable.

But, as always, never take tax advice from an anonymous post on the interwebs, talk to a CPA.

[Dave Foster]

@Amanda Harding, If you touch money or purchase less than you sold, the IRS considers that a taking of profit.

However, the way to accomplish what you want tax free would be to complete the 1031 exchange.  And then immediately do a cash out refi of the new property.  A refi is not a taxable event.  So you get the cash you want, defer all tax in the 1031.  And best of all, the tenant is making your mortgage payments.