Cash out refinance then later possible 1031 exchange

[James Findley]

I bought a SFR a couple of years ago for $140,000 with a mortgage, and after fixing up the house, moving out and converting it to a rental, I now have about about $200,000 in equity. Can I take a cash out refinance now (taking about $50,000 out now) then in a year or two do a 1031 exchange to a new property without the 50K being considered boot?

[Dave Foster]

@James Findley, Yes that's fine.  If you take out the refi well in advance of the sale and start of the 1031.  There's no statutory time frame.  But when a refi happens right before a sale and 1031 the IRS has had a tendency to view that as a way of taking profit and subsequently disallowed the exchange if it was audited.  A year or two in advance is generally fine.  And if you want to be more conservative wait until after the 1031 and refi the replacement property after the 1031 is complete.