All cash purchase with 1031 funds then refinance

[Matthew L.]

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?

[Dave Foster]

@Matthew L. 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.