1031 Single Property to Multiple Properties Strategy

[Chris T.]

I am looking into selling a single property and using the proceeds in a 1031 exchange to purchase 2+ properties.  My question for those that have done this or are familiar is what is the better strategy....1) Identify and purchase multiple properties in the 1031 exchange or 2) Purchase the first property in the 1031 and then after the needed seasoning period, do a cash out refinance and then purchase the second property.

I am not sure if one strategy is easier or more cost efficient than the other?  Obviously, if multiple properties can not be identified in the 45 day time period that makes the decision for me.  

Any insight from the experts would be appreciated.  Thanks!

[Dave Foster]

@David Shapiro, That's exactly correct!!!  In order to defer all tax in a 1031 exchange you must purchase at least as much as you sell and you must use all of the proceeds in the purchase.  If you take cash out (like scenario 1) the IRS sees that as taking profit so that $75K would be taxable.  

However, if you follow scenario 2 then the refinance is not taxable.  And yes you can use the proceeds for anything you want not just real estate (although there may be some impact on your ability to deduct the interest depending on what you buy).

Is this a great country or what!!!

BTW - For @Chris T.also I don't know if I came through clearly enough on another aspect.  If you purchase one property as a replacement and then refi you won't get access to your full equity.  So you will end up with more equity in each replacement property.  If you use the proceeds from the first 1031 to purchase multiple properties you'll have the use of 100% of the equity from that sale.  That may or may not be enough to make a huge difference to you.