Qualifying for a 1031 exchange

I cut and paste the following definition from Wikipedia on the subject of 1031 Exchange:

In order to obtain full benefit, the replacement property must be of equal or greater value, and all of the proceeds from the relinquished property must be used to acquire the replacement property.

First question: Can I max out a home equity credit line right before the sale of my relinquished property so to lower the amount of proceeds I have to put into the replacement property?

My challenge is that I have over $900K equity in a SFH rental and I want to hold back as much of the proceeds as possible to buy another property cleared of any 1031 conditions.

Another question is that after the exchange, If I cash out in a refinance to buy additional properties, do I still have to keep the same proceeds value in the original replacement property?

Thanks in advance to all those who can help.

Yes, you can refinance or max out your equity line at least six months prior to entering a 1031 exchange. Doing so immediately before the exchange will be considered having received taxable cash boot, and therefore nullifying a significant portion of the tax deferral feature of the exchange.

Completing the exchange first, then doing a cash out refinance for the replacement property is a better way to convert your equity to cash and does not disqualify the exchange. Refinancing the replacement property after the exchange has closed is not a taxable event.

From your question, I have to wonder what you hope to accomplish with an exchange and a cashout refinance, that you couldn’t accomplish by simply doing a cashout refinance of your investment property without doing an exchange. If you have no compelling reason to sell your investment property in the first place, just refinance it to get the cash you want. There is no tax consequence for withdrawing some of your equity with a cashout refinance.

Thanks Dave. That’s exactly what I need to know.

Your comment about cashing out from my current SFH to buy another property is great. Up to this point, I’ve been so fixated on increasing current cash flow.


Look at your stategy again. You want to cash out refinance your replacement property to buy more investment properrty. Why not include all the investment property you want to purchase in a single 1031 exchange?

You can exchange one relinquished for one or more replacement properties under the same exchange umbrella. As long as the total value of all the replacement properties equals or exceeds the value of the relinquished property and all the exchange proceeds are applied to the replacement property acquisition, your exchange is fully tax deferred.

What “1031 conditions” that you are trying to avoid?


My reason for minimizing roll-over equity in a 1031 exchange is so I can bottom fish better. I am hoping to be able to sit on $250K cash and be ready to pounce when the market bottoms.

Being a newby, I assume I can’t get the most out of a 1031 exchange (45 days to identify and 180 to close!!). Too many things have to work just right. I just might find myself having to settle for an OK deal.

Based on your suggestions, I am now checking if there’s any hope of doing a refi on the rental. If there is, my inclination is to sell the NJ rental near the next cycle peak, unless I see fantastic buys in commercial REs going forward.

If the chaos in the credit market prevails, I will check into robbing my IRAs.

What do you think?


If your IRAs are traditional IRAs, robbing them is generally a bad idea – early withdrawal penalty and your withdrawal is taxed at your ordinary income tax rate.

Roth IRAs allow you to withdraw your contribution tax free with no penalty.

The best answer to your question depends upon your IRA.

I am looking into self-directed IRAs. Looks feasible on the surface.

A Section 1031 Exchange allows you to sell your Relinquished Property and use the Net Sales Proceeds to purchase a Replacement Property, and thereby defer paying taxes on your Capital Gains.
However, if you try to refinance the Replacement Property after closing to get your Net Sales Proceeds back out, the IRS will declare that to be a “step-transaction” where you used two steps to get around the intent of the Section 1031, and you will be charged with paying taxes on the amount of the loan proceeds just like you had taken them out at closing. You can read more about this in my book, “How To Do A Section 1031 Like Kind Exchange” available on Amazon. Or go to my website, S1031Exchange.com for more information. Michael Lantrip