1031 Exchange into a Refinance

7 Replies

I’m looking at getting two investment properties to buy and hold for a few years then sell with the intent of utilizing the 1031 exchange program. What I’m trying to figure out is if I can refinance my personal residence with the 1031 funds when the investment properties are sold? That way it reduces what I will owe at that point and then I can move and rent my current residence reasonably within what a tenant can pay versus the inflated market we currently have.

Hi @Shawn Donnell and welcome to BiggerPockets!

I'm pretty sure the answer is "No." You cannot use 1031 exchange proceeds to refinance your personal residence. You must use the funds to purchase investment property, and your personal home would not qualify.

@Dave Foster is an expert on 1031 exchanges and can give you a definitive answer. I'm only half-way through his excellent (and FREE!) video training, so I guess now I'll find out if I've been paying attention!

Take it away, Dave!

@Mitch Messer ,

Appreciate the response because that’s where my confusion is. You say that and it does make sense but then I’m finding things on google where I can do it but then my home has to be a rental at that point and can no longer be my personal residence.

Residential properties, inventory, securities, trust certificates, corporate stock, or partnership interests cannot be exchanged under Section 1031 Internal Revenue Code, 26 U.S.C. § 1031. Profits from commercial properties can move from one investment to the next, so long as the like-kind exchanges continue.

Like-kind exchanges only apply to investment and business property and trades are fairly relaxed. By definition a like-kind real property exchange involves a trade of real properties within the United States that are the same in nature or character, even if they have different qualities.

Thanks for that shout out @Mitch Messer , You can share the URL for that video training if you want.  @Shawn Donnell ,  LIke @Ahmed Motiwala said, the 1031 exchange has to be a sale of investment real estate followed by a purchase of investment property.  So  you can't use the 1031 to either refinance a property you already own.  And you can't purchase your primary residence (yet...)

The way to accomplish what you want is to do a complete 1031 and sell an investment property and purchase an investment property that is a really nice property you might like to live in one day.  After using that property for investment for a year or two you have satisfied the intent requirement and can then change its use into your primary residence.  So you do a 1031 and then convert that new rental into your next primary residence.

There's some really good scenarios.  You just have to be patient.

At this point you haven't reduced your debt yet but you do have a choice.  You can sell your old primary residence and take the proceeds tax free under the primary residence exclusion.  And you could pay off that new primary.  That would reduce your debt.  Or you could rent out your old primary with the advantageous primary financing and do a refinance of your now new primary into a better loan as well.

You also don't have to make that decision instantly.  Once you move out of your old primary you can rent it for up to 3 years and still be able to sell and take advantage of the tax free primary residence sale.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here