Effect of cash out refinance on 1031 exchange?

4 Replies

The house was a primary residence then a rental and back and forth. If I move back in and cash out refinance then rent out again and 1031 exchange the house, what is the effect on the 1031 exchange? I imagine I will have less equity that I have to 1031 but more debt to replace per the IRS debt replacement rules. Other than that it seems like a good idea to cash out refinance before renting out again and 1031 exchanging no? I want to pool the money for future investment (I'm taking large cash positions right now for future buying opportunities) but leaving other properties rented with equity untouched.

@John Warren As always, thanks for the mention!

@Jack B. Of course you can refinance a property but it's usually recommended that you don't complete a cash out refinance directly before or directly after a 1031 Exchange. Under audit, the IRS could view it as taking cash at closing, which is taxable, if its too close to the 1031. So if you plan on doing the cash out refinance I would complete that now, then give yourself a few months (the longer the better) before you engage in a 1031. If you plan on doing a cash out refinance after you purchase your replacement, you may want to wait 2 or 3 months after that closing to complete it.

Let me know if you have any other questions!

Originally posted by @Lauren Speidel :

@John Warren As always, thanks for the mention!

@Jack B. Of course you can refinance a property but it's usually recommended that you don't complete a cash out refinance directly before or directly after a 1031 Exchange. Under audit, the IRS could view it as taking cash at closing, which is taxable, if its too close to the 1031. So if you plan on doing the cash out refinance I would complete that now, then give yourself a few months (the longer the better) before you engage in a 1031. If you plan on doing a cash out refinance after you purchase your replacement, you may want to wait 2 or 3 months after that closing to complete it.

Let me know if you have any other questions!

 Thank you! Yeah I was planning on doing it 6-7 months before. I actually got a quote over a year ago when I was fist thinking about it. Surprised even 3-4 months is enough time to wait.

@Jack B. Undoubtedly, you can cash out the refinance and then rent out your property again. However, you may have to wait for a year in case you want to do a 1031 exchange. Though there is no specific time for which a property must be used for investment purposes, anything less than a year could be questioned by the IRS. If they find any issue with the investor's intent behind the exchange, they can question that 1031 exchange anytime. Therefore, if you want to 1031 exchange your house into another property, make sure you've enough evidences to prove that it was being used for investment purpose and will be used in the same way after the exchange.

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