1031 exchange from a refi?

Question

Hello

it is my understanding that traditionally when you sell your property you can use the 1031 exchange to defer the taxes on the capital gains from the sale. i know a little about that but i am interested to know if when you refinance and not sell the property to pull out equity from a property can u also use the 1031 for that. for example if i use the BRRRR strategy to buy a 4 plex for $300,000 i use a conventional loan and put down 20% of $60,000 making the loan amount for $240,000 and put in $40,000 into rehab the property so i have $100,000 in and the property then appraises at $400,000 so i refinance the property with 20% down of $80,000 in equity making it a loan amount of $320,000 out of that of course the original loan gets paid back of $240,000 leaving me with a check for $80,000. so does that $80,000 count as capital gains? i hear a lot about the transfer of money from a sale but not how to handle moneys from refinance and i am not sure if it is the same in the end. i would say also that this is assuming this all takes place in less than one year? i am aware that if i live in the property for i believe 2 out of 5 years i can write off up to $250,000.

please help me clarify the details a bit guys.

thanks

arlen

Arlen Wood · Answer

thanks Chris

in your answer you say i would not be able to go 80% LTV. so i was wondering what would be the standard? would it be 75 or 70?

also the fact that cash out refinances are not taxable events sounds awesome to me. i would like to know a little more if possible. for example i was assuming that you would have to pay tax on the cash out especially if the property appreciated. is it that your holding onto the property that instead of selling it that makes the difference?

i am a noob here so the more i understand the process and reasons why are verry helpfull.

thanks again

arlen

Chris Mason · Answer

Cash out refinances are not taxable events in themselves, but you wouldn't be able to go to 80% LTV on a MFR non-owner occupied cash out. Fannie matrix, Freddie matrix.