The point of a 1031 exchange is to defer tax payment on a property until future sale. That being said, what does this mean for refinancing-cash out in the future? Can you still do this?
In other words, if you refinance and take cash out of a property that was purchased with 1031 funds, are you then taxed on that portion of the 1031 money? Is there anyone with personal or profession experience who could answer this ?
Thanks in advance.
Hey @David Cozzi , you should definitely double-check with your CPA on this one. However, in my opinion, since a refinance is not a taxable event, you should not need to pay capital gains on that money. No matter if the sale was through a 1031 or not.
@David Cozzi , yes you can refinance your property after doing a 1031 exchange at any time. The refinance is not a taxable event. @Brad Hammond , is right though that you'll want to coordinate with your accountant to ensure that you can write off the interest on that refinance. But the refinance does not trigger a tax.
@Brad Hammond and @Dave Foster
Thanks so much for the advice. I will definately double check with my CPA. The only issue is that many CPAs have limited experience in 1031s - It has been difficult to find CPAs who are well aquainted with 1031s/more complex real estate taxation. Any further advice/recs would be greatly appreciated.
@David Cozzi , It's really not a 1031 issue. The refi after a 1031 is fine. The use of the proceeds from a refinance may or may allow you to deduct the interest. Totally agree with you on CPAs and 1031. 1031s are two miles deep in a two foot crick. But most CPAs can guide you on whether your proposed use of the refi proceeds will still allow you to write off the interest.
The refi itself will not be a taxable event.