Refinance & 1031 Exchange

[Beth Watson]

I’m looking to potentially refinance a rental I already have & buy another rental property - 1031 exchange. Besides a mortgage broker & realtor, any other professionals that I should involve? Recommendations? (San Antonio/Austin, TX area)

[Dave Foster]

@Beth Watson, if you're not selling a property then there is no 1031 exchange.  So no need for a qualified intermediary for the 1031.  If you're looking to refi and then immediately sell and do a 1031 on the sale then you will need an intermediary for the sale.  And you'll want to talk to your accountant about the close proximity of the refi.  While not strictly prohibited, the IRS generally does not like refinances immediately prior to a 1031 as they see the potential for it to be a way of you accessing profit from the 1031.

So the general consensus is that it is best to complete the 1031 exchange and then immediately refinance to get cash out.  There are some accountants who feel very strongly that as long as you are using the refi proceeds as part of your normal business model to purchase property and the proceeds stay tied up in that property (rather than a trip to Cancun) that a refi followed by a 1031 is no problem.