Money spent on repairs for a 1031 exchange

[Fernando Domingo]

Hi BP,

I have searched a bunch of different places and none of the articles that I have read and seen don't mention this so I thought that I would through it out to the community.

Here is my situation:

- I have a rental property that I bought in 2014.  

- It has been rented until the beginning of 2018 when I evicted my tenants.  

- I spent over $35k in renovation the property and now I am selling it. I am currently in escrow.

- I want to 1031 exchange it into a new property, but i would like to get the money that I spent on repairs back to have liquid.  IS THIS POSSIBLE?

I know that in a 1031 you have to buy a property that is more than the sale price and the cash made from the property is supposed to be reinvested into the new property.  I haven't found anything on monies that was invested into the property and how that may be handled?

Does anyone have information on this or can they guide to something that has this information?

Any information is much appreciated.

[Dave Foster]

@Bob B. Sunset on St. Pete Beach with an umbrella drink!!!  Nice way to end a day.

 And the question is actually pretty straight forward. You just have to remember that the IRS doesn't care how much your profit is. They are willing to leave their tax in the game when you do a 1031 as long as you leave your profit in. But they interpret any cash you pull out as profit. Sneaky, I know !  

The two requirements to avoid all tax are that you must purchase at least as much as your net sale (this is the contract price minus closing costs). And you must use all of your proceeds in the next purchase or purchases (this is the net sales price minus any mortgage pay off). You can purchase less than what you sell. And you can take cash out (like the $30K of repairs) but in the eyes of the IRS that $30K is profit.

You're absolutely right that without a 1031 you would not pay tax on that $30K. But if you do a 1031 it's a different story - You say it's reimbursement of expenses - they say it's profit when you do a 1031 and take cash out. And since they have nuclear weapons they usually win the argument!

But, there are a couple of answers to your dilemma which is that you want that $30K back in your pocket.

1. You can do a partial exchange and take the $30K as cash at closing. The IRS calls that profit or boot and you pay tax on that amount but shelter the rest of your profit in the 1031.

2. Or you can complete a full 1031 exchange and immediately after the 1031 is complete you do a cash out refi of the new property. when you get money after the 1031 the IRS does not perceive you as taking profit out. They perceive that you are borrowing against equity so it's not taxable.