Cash out refi prior to 1031?

[Rob Golob]

I have a farm I would like to sell.

It is an investment property with cash rent.

I would like to “exchange” it for a single family rental but want to take cash out.

2012 purchase = $148,000

Value = $260,000

Current loan balance = $85,000

70% LTV refi = $182,000

Cash out = $97,000

Sell for $260,000

Pay off $182,000

Equity for new purchase = $78,000

1031 into a new $300,000 SFR

(Greater purchase price than sale price)

$78,000 down payment

(All proceeds toward new purchase)

Successfully avoid (legally) Cap Gains tax on $112,000

Successfully cash out $97,000 equity

Is this all good, correct, legal, logical, etc?

Comments, confirmation/denial, advise requested.

Thank you

[Dave Foster]

@Rob Golob, can't speak to the numbers and the return you can achieve.  But from a 1031 perspective theres a potential issue.

You're purchasing the right amount to meet reinvestment requirements.  And it will work with the cash you'd have left.   But if you refinance too soon before a 1031 exchange you run the risk of the IRS determining that your refinance was just an attempt to access ahead of a sale and 1031.  This has happened enough in the past that although it's not a huge risk it is a risk.  

What would be better for you would be to complete the 1031 exchange fully.  Buy for $the 300K using all 180K ish of proceeds.   And then after the fact do a cash out refi.  When done after the 1031 is complete there is very little risk of it being interpreted as taking profit from a 1031.

[Alex Bekeza]

@Rob Golob Your cash out refinance loan will likely have a prepayment penalty so you wouldn't want to pay it back in year 1.