Why You Should Always Do a Cash-Out Refi Before a 1031 Exchange

When it comes to maximizing your real estate investments, structuring your transactions smartly is key to growing your portfolio while minimizing tax burdens. One of the most powerful strategies involves combining a cash-out refinance with a 1031 exchange. Here's why it makes sense to do a cash-out refinance before initiating a 1031 exchange.

1. Access Equity Tax-Free

A cash-out refinance allows you to tap into the equity in your property without triggering a taxable event. Unlike selling your property, which would generate a taxable gain, refinancing does not result in immediate tax liabilities. By pulling equity out through a refinance, you can access capital to reinvest elsewhere, cover expenses, or diversify your investments—all without the burden of paying capital gains taxes.

2. Defer Taxes with a 1031 Exchange

A 1031 exchange allows you to defer capital gains taxes when you sell one investment property and reinvest the proceeds into a "like-kind" property. However, there are strict rules and timelines to follow, and the exchange does not eliminate taxes—it only defers them. If you skip the cash-out refinance step and go straight into a 1031, you lock up your equity in the new property, leaving less liquidity for future investments.

3. Maximize Leverage for Future Deals

By doing a cash-out refinance first, you extract equity and improve your liquidity, which can then be used as a down payment on additional investments. Once you've pulled out this cash, you can then execute a 1031 exchange to defer the taxes on the sale of the property. This gives you two advantages: tax deferral on the sale and available capital from the refinance to expand your portfolio or invest in other opportunities.

4. Reinvest without the Pressure of Exchange Deadlines

A 1031 exchange comes with strict deadlines—45 days to identify a replacement property and 180 days to close. If you need access to capital and haven't refinanced beforehand, you're under time pressure to complete the exchange. By doing a cash-out refinance first, you give yourself financial flexibility and reduce the stress of meeting 1031 exchange deadlines.

5. Better Financial Positioning for the New Property

After a cash-out refinance, you may have more cash available to reinvest. When moving into the replacement property in a 1031 exchange, you'll be in a stronger financial position, whether you plan to make improvements, expand, or simply cover costs. Having that extra liquidity can provide a cushion for any unexpected expenses or new opportunities that arise with the replacement property.

6. Tax-Efficient Wealth Building

When you combine a cash-out refinance with a 1031 exchange, you create a powerful wealth-building strategy. The refinance allows you to access your equity tax-free, while the 1031 exchange lets you defer capital gains taxes, effectively creating more opportunities to grow your portfolio and increase your cash flow.

Final Thoughts

Doing a cash-out refinance before a 1031 exchange allows you to tap into your property's equity tax-free, enhances your liquidity, and sets you up for stronger reinvestment opportunities. By taking this approach, you're not only deferring taxes but also positioning yourself for future growth without sacrificing access to cash.