1031: Can you use equity in replacement property to replace cash?

Question

For 1031 exchange, let's say you buy a replacement property that appraises for much more than the purchase price. Can the difference between the appraisal value and the purchase price count towards your cash replacement for the 1031? That way, if you find a deal like this, you can keep your cash capital-gains-free?

Dave Foster · Answer

@Ellie Narie, That's a great thought. But unfortunately you can only use the purchase price of the new property to determine if you have met your reinvestment requirements. But here's to sort of similar scenarios that might work: Because you don't have to replace the debt exactly. You only have to purchase at least as much as your net sale and use all of the cash from your sale in the purchase.

1. Use equity from a different property. Take a line out on it or refinance it. Then use that money to complete the purchase of your replacement property in the 1031.

2. If you're purchasing two replacement properties then buy the first one for cash. Immediately do a cash out refinance on it before you have to take title to the other replacement. Then use the refinance cash from the first purchase as your down payment on the second replacement. That's a great way to make your 1031 dollars work doubly hard. Just needs a little runway.

1031: Can you use equity in replacement property to replace cash?

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