Using a 1031 Exchange with a mortgage

[Robert Leonard]

Here's the scenario.  If I have $100k to exchange.  I want to buy a $200k property for $125k.  It expect about $25k of repairs & other costs.  I want to transfer the whole $100k "into" the property.  I want to borrow $50k at the time of purchase as a new first lien on the property to cover the balance owed and the repairs.  Is there anything in the rules that will not allow me to borrow against the property in excess of the balance of the purchase amount?  Is there any kind of requirement that would make me have to use a separate transaction or some other delay of time before I can access the equity by borrowing against it?

Otherwise, I could just get a loan for $30k and exchange only $70k into the property and use the remaining $30k for the purchase and repairs.  I understand that the $30k that would not be exchanged would be subject to capital gains taxes, so it would be reduced by the taxes of about $5k.  I'm sticking to simple numbers to focus on the rules for a minute.

I guess writing that out helped me get to my question: is there anything in the rules that would not allow me to borrow more than the purchase amount in a transaction that is partially paid for with a tax deferred exchange?

[Dave Foster]

@Robert Leonard unfortunately there is.  Whether you take $30K out of your exchange or borrow $30K too much the IRS interprets that the same way - it is a way of accessing profit.  And it would be taxable

The best way to avoid all tax would be to purchase the property for $125 using all $100K in your exchange acct.  Then immediately refinance and pull out the $25K you need to complete your improvements.

Another option that would accomplish the same thing and is vogue in these days of private lending would be to obtain a private short term loan for the $25K and complete your purchase using your exchange acct. and the private loan. Then have a cash out already set up so you can take out not only the $25K you need for the improvements but also have quite a bit of cash left over for other investing. Sort of a preliminary R in the BRRR thing.