All cash purchase with 1031 funds then refinance

1031 Exchanges
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All cash purchase with 1031 funds then refinance

Account Closed
Investor · NY · Member since 2014 · 74 posts · 49 votes

I have a rental I'm planning to sell in a few months and I'm thinking of doing a 1031 exchange. Couple of questions.

1) The purchase price was $165k and I had a $132k loan, approx $126k left on the loan. Recent comps are selling around $240k. Do I need to put 100% of the funds I get at the closing into the 1031? Or am I allowed to take out the $33k down payment + $6k in principal payments I made without paying tax?

2) I'd like to use the 1031 to make an all cash purchase and do a BRRRR. I'm not taxed on the cash out refi correct?

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y

@Account Closed This is a very common question and the answer starts with the two requirements for complete tax deferral.  You must purchase at least as much as you sell (around $240K) and use all of the proceeds in the next purchase (around $114K or thereabouts).  

If you want to take some cash out you can but any cash you take out of the deal is treated as profit and taxable.  You  want to specify that what you take is your original capital but the IRS will not allow that.  They simply say, "No you always take profit first". Since they have the standing army and nuclear weapons they win!

However, your best strategy is what you describe.  Complete the exchange.  Purchase at least 240 and use all 114 to do it.  Then immediately refinance and get that cash out.  It is not taxable when you are borrowing money.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Account Closed This is a very common question and the answer starts with the two requirements for complete tax deferral.  You must purchase at least as much as you sell (around $240K) and use all of the proceeds in the next purchase (around $114K or thereabouts).  

    If you want to take some cash out you can but any cash you take out of the deal is treated as profit and taxable.  You  want to specify that what you take is your original capital but the IRS will not allow that.  They simply say, "No you always take profit first". Since they have the standing army and nuclear weapons they win!

    However, your best strategy is what you describe.  Complete the exchange.  Purchase at least 240 and use all 114 to do it.  Then immediately refinance and get that cash out.  It is not taxable when you are borrowing money.

    The 1031 Investor5137 Reviews
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  • Account Closed
    OP
    Investor · NY · Member since 2014 · 74 posts · 49 votes
    9y
    Originally posted by @Dave Foster:

    @Account Closed This is a very common question and the answer starts with the two requirements for complete tax deferral.  You must purchase at least as much as you sell (around $240K) and use all of the proceeds in the next purchase (around $114K or thereabouts). 

    I thought I only had to purchase at least as much of the cash I received from the sale, not the total sale price. So flipping it into an all cash purchase is out of the question unless I come up with an additional ~$130k. It will make more sense for me to split the proceeds into down payments on 2 houses then. Thanks for the clarification!

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  • Drew Reynolds
    Austin, TX · Member since 2016 · 70 posts · 42 votes
    9y

    The purchase price of your replacement property must be equal to or greater than the sale price of your relinquished property. Likewise, the mortgage amount on your replacement property must equal or exceed the mortgage balance you paid off when selling your relinquished property.  

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Account Closed is right.  If you want to defer all tax you just purchase equal to or greater than your sale.  However like we discussed above you can take boot out and pay tax on that if you want.  

    Also, there is no statutory debt requirement.  You must use all of the cash proceeds in the next purchases but the source of the remaining funds to replace the old mortgage do not have to be a mortgage if you have other cash sources, want to borrow from  yourself, tap equity in another property, etc.

    Purchase at least a much as you sell.  Use all of the proceeds in the purchase.  Do this and you avoid all tax.

    The 1031 Investor5137 Reviews
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  • Doug Napieralski
    Investor · San Diego, CA · Member since 2016 · 9 posts · 7 votes
    9y

    Great information, I too was not aware the full selling price must equal the new purchase price.  Changes my plans to do all cash purchases since I have a small loan on my property to be sold.

    Thanks for also helping me understand guys.

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