Refinance right after 1031 exchange

[Michelle R.]

My question is : how soon can we refinance after closing on the replacement property?  

We sold a property for 1.95 million.  The replacement property we will be purchasing is at a price of 2.9 million. We want to have 25% down in the new property but I believe we have to spend all our proceeds for the 1031 exchange to be done correctly.  We have a good relationship with our bank and they will help us conform to the 1031 exchange rules. 

How soon can we refinance? (Can we close and then refinance that same day? Or can we sign papers at the closing table for a refinance that will go through the following day?). What is the best way to handle this? Thank you for your input. :-)

[Dave Foster]

@Noi K., I totally agree.  It's nonsensical.  And yet that's how the scrutiny and case law have developed.  In theory a refi prior to a sale does not save any tax because the 1031 exchange requires full reinvestment including of the amount of debt paid off in the sale in order to defer all tax.  Yet the IRS is prone to treat it like a step transaction of some sort.

But the IRS seems to make a big distinction between taking cash and then replacing debt and taking on debt after the fact.  In effect they are saying "if you are going to take cash out that is in any way close to or related to your 1031 we will treat it as taking boot (whether or not you later replace that boot with new debt).

There is not a bright line test on refi prior to a sale.  It's just a trend and propensity.  Many people will refi not too long before a sale.  But the encouragement is to make sure you have a legitimate business purpose that is part of your normal model (like a Brrrr thing) and not to take a trip to Cabo.

Every once in a while the gummit does something that makes you go hmmm.  (OK maybe more often than that)