1031 Cash Out Question

2 Replies

There are two properties, the investment property to 1031 and my primary home. I need $100k out of the investment property to lower the principal on my primary and refinance it. I am already planning on selling the investment property and doing a 1031 into another deal. The investment property is worth $1mill. What is the best way to get the $100k I need? It would be more economical to sell the investment property and take the $100k from the proceeds. If the replacement property is $1mill or more, now with an additional $100k mortgage, is it still a legit 1031? Should I cash out refinance the investment property to get the $100k before I sell it? This would be more costly with the refinance fees, etc... 

Thanks for the feedback!


@David Edelstein , you have a lot of options depending on the particulars of your situation.  Much depends on how much profit there is in your investment property and the cost and timing of the refinance.  But here's some general feedback.

1. A cash out refinance within a year of selling it and doing a 1031 is not a good idea.  These types of transactions have been looked at unfavorably by the IRS as a way of accessing your profit while still taking advantage of the 1031 and there have been some that have been disallowed upon examination.  However, you could complete your 1031 and then cash out refi the new property.  This is perfectly fine.  Of course you'll have to factor in finance costs to determine the viability of this approach.

2. On a sale of that size a partial exchange is probably your best bet.  Taking some cash at closing does not jeopardize your entire exchange as long as it is done properly by your QI.  In order to defer all tax you must purchase at least as much as you sell and you must use all of your proceeds.  But that is only if you want to defer all tax.  If you wanted to take $100K in cash at closing it can be put on the settlement statement as boot to exchanger and go to you.  Your reinvestment target then becomes $900K. The $100K would be taxable but you could still defer tax and depreciation recapture on the remainder.  In this event it is important to know your gain situation.  If there was $500K in gain and you took 100K in boot you would pay tax on 100K but would shelter the tax on the remaining 400K.  

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