Paying back LLC members and 1031 Exchange

[Josh Skogen]

Hello. I'm part of a 4- member LLC, which owns a SFR. We are selling the property and would like to use a 1031 exchange. Now, the four of us have contributed from our own pockets towards the purchase and renovation of the house. We have this accounted for in our yearly taxes, too. Would we be able to have that money returned to us at closing without that money being taxed? Could it be considered as though our personal pocketbooks are the bank that has lended to the LLC, and we are owed the money back at closing? Or does a 1031 exchange not allow any money to go to the members of the LLC?

[Dave Foster]

@Josh Skogen, Thanks for those kind words!  A cash out refi immediately after a 1031 is complete is exactly what most of our clients will do rather than pay tax.

I don't know numbers on your situation at all, but a potential hack that works really well with this is to complete your 1031 exchange and buy 2 replacement properties.  One of them for cash and one with maximum leverage.  By doing this you've fully satisfied the 1031 exchange and owe no tax.  Your leveraged property satisfies any mortgage that was outstanding on the old property.

But now you also have a free and clear property that you can encumber with a note at any time.  You can do it as soon as the 1031 is complete.  Or keep it available and in the wings.  But you won't be spending lending costs and then immediately incurring new lending costs.  And you'll be concentrating your equity so you can access more of it.

A great strategy