Boot on a 1031 Exchange

[Frank Harrington]

You have a property worth $800k. Mortgage is $300k. You sell the property and have $500k profit proceeds (for simplicity, no costs).

For a 1031 can you buy two replacement rental properties; One for $400k paid in full, zero mortgage. Then a second for $400k or more with 100k down and at least a $300k mortgage?

After the close of the 1031 in the above scenaio, could you then cash out refinance the fully paid property and make use of the cash? You would have lower fees and costs than trying this with the two properties.

The thinking is this. Getting cash flow from both properties after a 65% or so loan may work but you are realy left with no cash. To get cash after closing you would incur costs and fees on the two loans.

Or you would have great cash flow from one property and hopefully debt coverage on the other.

[Dave Foster]

@Frank Harrington yes! As long as you meet your reinvestment requirements of the 1031 exchange, you can allocate the proceeds any way you like. We call this a diversification exchange. Investors who want to diversify into better markets and mitigate risk by purchasing one property with cash and the second with debt will utilize this strategy.

There's nothing wrong with doing a cash-out refi immediately after your 1031. This is actually a tax-free way to access some cash since you must leave all of your proceeds in your exchange to satisfy your reinvestment goals. Some investors will even use it as a down payment on another property. Great thinking!