Cash out refinance

[Aaron Smith]

I was wondering how cash out refinances work in relation to 1031 exchanges.

In the 1031 exchange, you have 45 days to select 3 different options for the next property to buy.  But as far as I can see, a cash out refinance has no such time restrictions.  Is this correct?

[Travis Sperr]

Originally posted by @Aaron Smith:

@Dave Foster , thanks for advice. 

Let me give you my scenario with the real numbers.

I have a property worth 550k. I owe 280K, I have 35k in principle (FHA loan). I think if I hold it for a year, it will likely appreciate more as Denver is still a very hot market. At the same time, I want to take money out so its not just sitting there. My plan:

take out 100k in a cash out refi to invest in multifamily properties during that year.  At the end of the year, sell the original property doing a 1031 exchange.  However, I read that you need to invest all of the proceeds from the original property in the new one.  So, therefore the 100k I took out for the cash out refi would be taxed as boot, correct?

Also, can I put the 1031 money into more than one property worth = or greater than the original property.  Thanks for your input.

Correct that the money you are taking out will be taxable up an the sale, because you will have already invested elsewhere unless you have the cash to make it up at the time of the exchange. Your tax basis and mortgage amounts are unrelated. Most of the 1031 sites offer a ton of information on the specifics. 

I am just wrapping up a reverse 1031, it is more expensive but in your case would allow you to take that line of credit and buy something else before selling the subject property and doing it tax free. 

Also look at a 1031 calculator, no likes paying taxes but you might find your liability is better paid than being forced to roll into a marginal deal.