Seller financing and 1031

[Veronika Von]

Hey guys, i was hoping to get some answers in this particular situation. 

We got this property under contract with seller financing almost 2 years ago. Placed renter in there. Right now going through refinancing mortgage on my partner`s name(as investment property). Planning to do updates on property and sell it in the end of this year. Is 1031 is a possibility in this case, we would like to buy a fourplex next. 

Thank you.

[Bill Exeter]

Originally posted by @Account Closed:

The Replacement Property contains none of my $140,000 transferred basis from the Relinquished Property, and none of my $200,000 deferred capital gains on the sale of the Relinquished Property, and none of the $60,000 unrecaptured depreciation from the Relinquished Property, all of which make up the very foundation of the Section 1031 Like Kind Exchange statute.

Treasury Regulations Section 1.1002-1(c) concerning Sales and Exchanges, referring to Section 1031, says "The underlying assumption ... is that the new property is substantially a continuation of the old investment unliquidated."

If I have $400,000 in my pocket and no equity in my Replacement Property, I think I've liquidated the first investment, and Section 1031 has no relevance.

Hi Michael,

Refinancing after you have completed your 1031 Exchange is completely acceptable.  You would still have your deferred gain, deferred depreciation recapture and your deferred cost basis in the new property.  You would merely have significantly more debt than you had before.

I would personally not refinance immediately after you have completed your 1031 Exchange.  The key is that you must have the intent to reinvest in replacement property and to hold that property for investment purposes.  There are cases that involve an immediate refinance, but the ultimately rulings generally do not comment on the actual refinance/cash out and are therefore not on point.  I would wait a few months so that you have enough time between the actual purchase/exchange and then do a cash out refinance.