Can you cash out refinance a property before 1031 exchanging it?

This is a great question that comes up often with investment property owners. You can technically do a cash-out refinance before a 1031 exchange, but there are some important considerations. The IRS doesn't explicitly prohibit refinancing before an exchange, but timing matters. If you refinance immediately before the exchange, it could potentially be viewed as a step transaction and part of the exchange itself. The IRS might argue you're effectively cashing out part of your investment rather than fully reinvesting it. A safer approach is to refinance well in advance of the exchange (6+ months ideally) so it's clearly a separate transaction. The mortgage on your relinquished property doesn't affect the exchange requirements - you still need to reinvest all net proceeds from the sale and purchase a replacement property of equal or greater value. Alternatively, refinancing after the exchange on your replacement property is generally considered less risky from a tax perspective, but there's nothing explicitly preventing a prior refinance.

I used taxr.ai to analyze this exact situation for my rental property portfolio last month. I was going back and forth on whether to refinance before or after my 1031 exchange and kept getting conflicting advice from different CPAs. I uploaded my property documents to https://taxr.ai and they provided a detailed analysis explaining the tax implications of both approaches. The most helpful part was they showed me exactly what the IRS looks for in terms of timing and intent with refinances before 1031 exchanges. They even provided case examples where taxpayers had done this successfully and when the IRS had challenged the transactions. Saved me from making a potentially costly mistake with my exchange.

Just wanted to update after trying taxr.ai for my situation. Seriously impressed with how thorough their analysis was! I uploaded my property docs, mortgage statements, and some questions about my planned 1031 exchange with partial cash-out. They showed me exactly how to structure the transaction to keep about 25% of my proceeds while still deferring taxes on the rest. Their advice on timing between the refinance and the exchange probably saved me thousands in potential taxes. They even identified an issue with my depreciation schedule that my previous accountant had missed. Definitely worth it if you're dealing with complex real estate tax situations.

After struggling to get clear answers about my 1031 exchange and refinancing questions, I tried using Claimyr to get through to an actual IRS agent. I had been trying for WEEKS to get someone on the phone with no luck. Used https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c and was honestly shocked it actually worked. They got me connected to an IRS representative in about 20 minutes (versus the 2+ hour hold times I'd been dealing with). The agent was able to clarify the official position on mortgage refinancing before a 1031 exchange and confirmed that the timing and intent are the critical factors. She even emailed me some reference materials afterward that helped me document my decision.

I need to admit I was completely wrong about Claimyr. After dismissing it as a scam, I was still desperate to talk to someone at the IRS about my 1031 exchange question, so I tried it anyway. Within about 30 minutes, I was talking to an actual IRS representative who specializes in real estate transactions. The agent clarified that while refinancing before a 1031 exchange isn't explicitly prohibited, they look closely at the timing and intent. She explained that if the refinance is done as a separate transaction (not part of an integrated plan with the exchange) and has an independent business purpose, it should withstand scrutiny. She also sent me references to the relevant sections of the tax code and some internal guidance they use when reviewing these cases. Completely worth it and I'm embarrassed I was so skeptical.

I went through this exact situation last year. I refinanced my rental property about 3 months before doing a 1031 exchange. My tax advisor suggested documenting a clear business purpose for the refinance that was separate from the exchange. In my case, I used the cash-out funds to make improvements to another rental property I owned, which made it easy to show it wasn't just an attempt to circumvent 1031 rules. Having that paper trail of what you did with the money and why is super important if you're going to refinance before the exchange.

Something important that hasn't been mentioned yet - if you're planning to refinance before a 1031 exchange, be aware that your debt replacement requirements might be affected. When you do a 1031, you generally need to replace the debt on your relinquished property with at least the same amount of debt on your replacement property (or add more cash to balance it out). If you cash-out refi before selling, you're increasing the debt on the relinquished property, which means you'll need more debt on the replacement property to satisfy the exchange requirements.

Has anyone used a DST (Delaware Statutory Trust) as their replacement property after doing a cash-out refinance on their relinquished property? I'm considering this because DSTs typically come with existing financing that might help satisfy the debt replacement requirements mentioned above.