Cash out Refi tax implications

[Patrick Woodard]

Hi, I've been a longtime member (lurker), but this is my first post.  I need some advise on what to do with the proceeds from a property I am selling.  Here are the details:

My business partner and I bought two fourplexes for 75K apiece with a 20K construction loan apiece, with no money down (REO). We have rehabbed the units and rolled the construction loans into the purchase loans. Both are now cashflowing, but we are selling one of them for 123K, for a profit of 28K. The decision to be made is whether or not to do a 1031 Exchange or not. It's less than a year, so it will be taxed as regular income, but if we do the 1031, the proceeds will be rolled into the new property.

What we are considering doing is to get another property and do the 1031, and after we have rehabbed the building, do a cash-out refi for 28K or more. Will we have to pay taxes if we write checks to ourselves from our LLC for 14K each? We want the cash, but if we are to be taxed on it after a cashout refi, we might as well not even fool with the 1031. Since the LLC is a passthrough, I would think that the refi would only increase the basis on the new property, not cause us to have to pay taxes for cashing out the 28K.

How should we go about this?  I thank you all in advance for any feedback or advice.  We've done some other deals, but nothing this "fancy".