1031 Improvement Exchange

[Michael Branch]

Hi folks! My first post!

Hopefully a quick question for you smart folks. I’ve looked into some research on 1031 exchanges but can’t quite confirm my thoughts. 

I currently have a SFR investment property (my first home, moved out and kept as a rental). The lease is up in a few months and I'm looking to sell and reinvest (HOA fees destroying cash flow). I'm reading David Greens BRRRR book and it has be intrigued on that method of investing.

My question (numbers are round examples, but close to what I’m thinking):

Let’s say I can get $40k of equity in the purchase (house sells for $145k, I only owe $105k). Assuming I can get 20% down loan, could I buy a $60k property (spending $12k of equity) and use another $20k of the equity on rehab, and then just get taxed on the last $8k (allowing me to have extra cash on hand to start my rainy day fund for that property, handle vacancy, etc)?

Then my plan would be to wait a year (seasoning period), refinance based on ARV, pull much of my money out and repeat.

Can the exchange work in that way? I've heard that the property that is exchanged for must be same value? Would that mean I'd have to find a property such that the ARV is more than $145k (in other words, spend more on down payment and less on rehab)? If that's the case it doesn't seem like a feasible strategy in this particular case.

Thoughts? Thanks in advance for your help.