Would this be possible using a 1031 exchange

Question

I have a 4xunit building in Minnesota selling for 240K, of which 106K goes to clear the bank, leaving 134K.

Through a 1013 exchange, would it be possible to purchase a new property, for say,280K using the 134K plus 46K mortgage from the bank, of which I refinanced in 6 months and retrieve the balance of the money, leaving behind the 20% for the bank.

Would the deferred tax situation for a1013 exchange remain the same.

Dave Foster · Answer

@Mario Alexandrou, A cash out refinance is not a taxable event.  This is a very common strategy that works great when you want cash out but also want to defer all tax.  Complete the 1031 exchange.  Then do a cash out refinance after the 1031 is complete.  You get to defer all tax in the 1031.  But you still get cash in your pocket for other uses.

The key is to do it after a 1031 and not immediately prior to a sale.  The IRS has a propensity to call a cash out refi before a 1031 just another way to access profit.  When done after a 1031 you 're not taking profit.  You are borrowing new money secured by equity in a property you own.  and that' works fine!

James Hamling · Answer

One additional note to what Dave perfectly covered;

That 1031 deferred amount transferred into this replacement property, is NOT impacted by any re-fi/ mortgage/ heloc situation. Which means, let's say you re-fi to a 90% LTV. And then a year later sell this replacement property, getting a check at closing for $15.75, you WILL owe that tax burden from that $134k unless you do a 1031 again, which will be complicated if had spent all the $ from re-fi and only have that $15.75 from sale in your pocket. Thus Uncle Sam will be expecting that tax bill to come due.

Just keep that in mind. I have heard a few persons who thought doing a re-fi could "wash-out" that tax implication, it does not. A 1031 defers tax impact, it does not vacate or relinquish it. Defer as in push out to a future time.

Also, be careful to keep in mind your leverage ratio to not over-leverage. It's bad enough to get in an over-leveraged situation requiring an immediate sale but adding a huge added tax burden cost to such can turn a bad event into a nightmare scenario.

Mario Alexandrou · Answer

Thank you so much for your detailed advice. So I actually made a sale today and place the money in the 1031. I intend to purchase a property with this and say in six months, refinance and extract my original money. If I were to sell this new property, is that when I would pay taxes, or do I just defer paying the taxes and 1031 again. Once again thanks for your advice.

Steve Wolterman · Answer

Yes, you can refinance the $280k replacement property as soon as you would like after you have acquired it.  The IRS is fine when you refinance the the replacement after acquired in a 1031.  You never want to refinance the relinquished property prior to selling, however.

Would this be possible using a 1031 exchange

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