Renovate a rental then sell

[Lisa Davis]

We've held a rental for 14 yrs now. Tenant is moving out, I need to renovate to sell.  We did a 1031 exchange to purchase this property in '04 and will go through the 1031 process again when this one sells.  How can I avoid paying out of pocket for the renovations  needed? (approx. $35k).  

Many thanks, sorry if this was previously asked -I couldn't locate if it had been.

[Dave Foster]

@Lisa Davis, I'd be cautious with the refi now plan.  Yes from a cash available expediency approach this would be a perfect solution.  

But you're looking at 1031 and that's another can of worms.  The IRS has been pretty consistent that they do not like refinances right before a sale.  They view them as a taking of profit and it could jeopardize your exchange if audited.  

Yes, I get that you would not be taking profit and would only be using the money for the rehab.  So technically it all ends up  in the same bucket of net sale and gain.  Can you explain it - sure but the IRS has a pattern of saying "I don't care".

the best way to do this would be to rehab out of pocket.  Sell and do the 1031.  Then refi immediately after purchase and reimburse your rehab expenses.  While the IRS has shown they care if you refi before a sale they have not been nearly so picky about refi after a purchase in a 1031.

And if you can plan ahead for next time.  Do the refi at least a year before sale and put the money in a sunk fund to be ready.