Cash out after 1031

[Angela A.]

Hi All,

I am considering doing a reverse 1031. Following is the scenario.

I will buy a replacement property at $1M, with $500K down. After that, I sell the relinquish property at $450K, free and clear. The $450K will be returned to me as payback of my loan to the intermediary when the sell completes, without triggering any capital gain taxes, right?

Say, 3 month later, I decide to do a cash out refinance of the replacement property at 75% LTV because the rate is lower. Assuming the property is still valued at $1M. The current loan is $500K, and I will get $250K out. Will this cash out have any tax implication on the 1031 exchange already completed?

I really appreciate your comments.

Angela

[Dave Foster]

@Angela A., That would work as long as you mean that your QI will be buying the new property and holding it until you sell your old property.    They will be able to hold it for up to 180 days to give you time to sell your old property.

The complications with reverse exchanges and lending is exactly what Bill asked.  You have to guarantee the loan but you are not a buyer of the property.  Your QI is.  This pretty much wipes out any conventional lender.  Most reverse exchanges are done with cash from the client or a private loan of some sort from an individual or a portfolio bank.

When your old property sells you will have that cash in your account to purchase the new property.  You can "buy" the property from the QI for the $450K (the amount you lent to them).  And you assume the rest of the mortgage that you're already guaranteeing.

Your idea to refinance immediately after to get favorable financing is perfectly fine.  There are a few folks out there encouraging some seasoning.  But there's no body of case law indicating that to be a concern. Refinancing  immediately prior to a sale - yes that is a cause for some seasoning.