I'm in the middle of closing, and I'm looking to use 100% of funds from 1031 we just sold, on a property we are buying, but I also have a loan already lined up behind that. The 1031 company say I can show cash being return on the HUD. Is that true? Is there a work around?
Example would be, I got 100k from selling a property, I bought another property for 100k, and used the 1031 cash, but then also got 100k loan at the same time.
I think I'm answering my own question, which is NO:
Refinancing to pull equity out of a property prior to or after completing a tax deferred exchange can result in a taxable transaction under the “step transaction doctrine.” The IRS can argue that a “cash-back” refinancing, immediately before the exchange is completed, is just one step in many steps that results in not reinvesting all of the equity from the Relinquished Property. It follows that the refinance loan proceeds would be taxable as boot. This “step transaction” doctrine allows the IRS to re-characterize seemingly separate transactions into one transaction for tax purposes
@Levi T. there's a theory that people who talk to themselves are simply trying to converse with the smartest guy in the room!! That may be true in this case - cause it sure ain't your intermediary for the 1031 if that's really what they said. They fail 1031 basics - 101.
Any HUD reflecting a 1031 that show an additional loan has to show the cash coming back to you. That's boot all day long!!!
The only way you can show cash coming back to you on the settlement statement is if it is a return of earnest money you have previously placed. And that requires special treatment. Even deposits and prepaid rent puts you at risk if it's on the settlement statement.
The answer is to finish the 1031 with the purchase using all of your 1031 proceeds. And later take out debt. yes, there is some small risk of a step transaction when done immediately after the fact but that risk is very small and if you let a small amount of time go by that risk goes away as well.