1031 Exchange on a Cash-out Refinance????

Question

Hey gang.  I was thinking about this and curious if its possible.  Has anyone done it?  I have properties under contract that I want to purchase.  Can I do a 1031 exchange on a cash-out refinance or does it have to be on a sale?  If I can do it, how much does doing a 1031 delay the process?  I'd like to do these refinances/purchases within 90 days.  Thanks!

Jaysen Medhurst · Answer

You do a 1031 exchange on a sale, @Kevin Christensen. What are you trying to accomplish? There are no capital-gains tax implications when you do a cash-out refi.

Daniel Schiller · Answer

I'm confused what you are asking.  A cash-out refi is not a taxable event. You can turn around and use those funds however you see fit.   1031 exchange is related to capital gains deferment at the time of sale.

Dave Foster · Answer

@Kevin Christensen, Purchase and cash out refinance away!!!  This is the third "R" of the famous BRRR+R strategy.  Buy...rehab,...rent... refinance.  A refinance is not a taxable event so there's no issues there.  The 4th R I added.  It stands for "re-evaluate".  You refinance and pull the cash out for more investment or whatever.  And then you periodically re-evaluat that property's performance to see if it's time to sell.

If it's time to sell then that is when you do the 1031 exchange.  You sell that property and all of the debt is paid off (including the refi mortgage) and you purchase new investment property.  So you can then continue your tax deferral and also have gained tax free cash through the refinance.

But beware, the equity in your property is not an indicator of the gain and potential tax.  It is possible to refinance a property so there is little equity.  But because it had appreciated so much and you took the appreciation out in the refinance you have a large tax bill and little cash to pay it.  This is again where a 1031 can help you as long as there's enough equity left (or you have enough personal cash) to fund the down payment on your next property.

Dave Foster · Answer

@Maugno M., You may be able to do a 1031 exchange and defer the tax.  Much is going to depend on the specific facts in this case.  I'm happy to process with you.  I'll PM you so we don't hijack the thread.

Maugno M. · Answer

@Dave Foster I have some land ( about 8 acres ) that I invested in buy adding mobiles home to it. I have 4 cash flowing mobile homes now. Im thinking about trying to sell all of it. I guess i'd be on the hook for capital gains if I sold ? Do you know how I can defer with the 1031 exchange or do you offer some type of consultancy ?

Michael Skoczylas · Answer

These guys nailed it. A 1031 is only for a sale and purchase. A cash out refinance will in most cases be a tax-free transaction. Go buy those properties on the cash out refinance- then 1031 them when you are ready to sell!

Kevin Christensen · Answer

@jayden @daniel Thanks guys.  This is my first time doing a cash-out.  I wasn't aware that it wasn't affected by capital gains.  I was trying to avoid it.  Great info.  Quick answer.  I appreciate you guys.

1031 Exchange on a Cash-out Refinance????

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