1031 Exchange or Cash Out Refinance?

I am often asked, “Which is better, a 1031 exchange or a cash-out refi?” As always, my answer is that it depends on the specific situation. In this post I will provide insight into the two options and when they make sense. See the table below.

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Replace the property

If you do not want to keep the property, there are two options to consider. If you have a significant amount of equity, a 1031 exchange may be the right choice. A 1031 exchange enables you to defer paying taxes on the sale of the property by reinvesting the proceeds in a new investment property.

If you have limited equity, selling it and using the proceeds to purchase another property may be the most advantageous option. This is because there will likely be little or no taxes due on the sale of the original property.

Keep the property

If you have significant equity and want to keep the property, then a cash-out refi is likely the most advantageous option. Many investors use a 75% cash-out to buy an additional investment property.

Some Considerations

• 1031 Exchange - A 1031 exchange allows you to defer taxes on the sale of an investment property by rolling the proceeds into a new investment property. However, a 1031 exchange has strict rules and deadlines that must be followed. For example, you must identify potential replacement properties within 45 days of selling the original property and close on the new property within 180 days. If the rules are not followed, the tax deferral will be lost, and you will be liable for capital gains taxes.
• Cash-Out Refinance - With a cash-out refi, you refinance the existing mortgage and take out a new loan for more than the amount owed on the original mortgage. The difference between the old loan and the new loan can be used for any purpose. This option allows you to access equity and use the funds for other investments or expenses. A cash-out refi is a more flexible option, as there are no strict rules or deadlines. Consult with a tax professional to determine the tax implications of a cash-out refinance in your specific situation.

In conclusion, whether a 1031 exchange or a cash-out refinance is best depends on your specific situation, amount of equity, taxes, and your goals.