1031 & Delayed financing

9 Replies

Does anyone know if you are able to do delayed financing if you use a 1031exchange to buy a house? From what I understand if the government believes you are doing a 1031 and a cash out refinance directly after just to avoid paying taxes than they will not allow it. However if you are refinancing for a business purpose (aka to buy more houses) they will allow it? 

Any advice would be appreciated! 

Originally posted by @Connor S. :

Does anyone know if you are able to do delayed financing if you use a 1031exchange to buy a house? From what I understand if the government believes you are doing a 1031 and a cash out refinance directly after just to avoid paying taxes than they will not allow it. However if you are refinancing for a business purpose (aka to buy more houses) they will allow it? 

Any advice would be appreciated! 

 After the 1031 exchange is done, there are no special mortgage guidelines that would prohibit this, no. And I have never heard of cash out refinances being taxable events. So while I would double check with a tax professional if this is an important part of your strategy, my guess is you're good to go, no "business purpose" needed.

@Connor S. , you never say never when it comes to the gummit.  But in general where you'll get heartburn from the IRS is if you refi immediately before a 1031 starts.  That's been consistently dis liked by the IRS.  Refi's after a 1031 are not the same.  In a  refi after a 1031 you are not accessing gain you are borrowing against equity in a property you are holding for productive use (the whole premise of the 1031).

Here's the disclaimer.  If the IRS thought you were a bad actor and wanted to get at you anyway, could they challenge a refi done immediately after a 1031?  Sure but those instances are hard to prove and very very rare.  Have your ducks and rationales in a row and wait till after the 1031 is complete.  Unless you're Al Capone you'll be fine.

@Connor S.

I stumbled across this thread and wanted to see how things turned out? Did you do a 1031 and then subsequently do delayed financing?

I am thinking about doing something very similar soon. I want to do a 1031 and acquire two condos. If I cannot identify and line up financing for the two units within the 1031 time frame then I am considering acquiring one unit, then do delayed financing on that unit to acquire a second.

@Jennifer Bendewish , You gotta take what the market gives.  And what you're proposing is the perfect move for this market.  If you can find two replacement properties then by all means make that your 1031.  But if not, then find one property that fits your reinvestment requirements and do a refi after the purchase to get cash out tax free.  And now you're not constrained by time to find your next one.  We're seeing this more and more.

Originally posted by @Dave Foster :

@Connor S. , you never say never when it comes to the gummit.  But in general where you'll get heartburn from the IRS is if you refi immediately before a 1031 starts.  That's been consistently dis liked by the IRS.  Refi's after a 1031 are not the same.  In a  refi after a 1031 you are not accessing gain you are borrowing against equity in a property you are holding for productive use (the whole premise of the 1031).

Here's the disclaimer.  If the IRS thought you were a bad actor and wanted to get at you anyway, could they challenge a refi done immediately after a 1031?  Sure but those instances are hard to prove and very very rare.  Have your ducks and rationales in a row and wait till after the 1031 is complete.  Unless you're Al Capone you'll be fine.

@Dave Foster

Read this thread a month ago as we were purchasing a 1031 replacement property. We closed last week. Did it as a cash purchase since appraisals were 45-60 days out and holding up the loan to meet closing date. $775k purchase with $320k exchange proceeds.

I contacted a loan broker we've used several times in the past. He spoke with their underwriter and said they can do delayed financing, up to 75% LTV, but all exchange proceeds need to remain in the property. Based on his email, we could only finance $455k (59% LTV). We were planning to finance up to the conforming limit ($548,250 or about 71% LTV).

Is this just something with this particular lender requiring exchange proceeds to remain in the property, and another lender could have different rules? If we are stuck with a $455k loan, guess we need to evaluate just waiting 6 months and do a normal cash-out refi.

Thanks,

Mike

@Michael Vest , There's been a joke in the 1031 industry that describes how long you need to wait to do a refinance after a purchase and completion of your 1031 exchange - "long enough to put one pen down and pick up another"!!!

Cash outs after a purchase are not considered high risk activity like a cash out prior to a sale is.  

I'm not familiar with a lender that requires 1031 proceeds to stay in the property.  Sounds more like an underwriting excuse to me.  Cash is fungible.  If the IRS was going to have heart burn it would have it with the first dollar out.