when should i refinance or 1031 exchange my rental property

when should i refinance or 1031 exchange my rental property

Deciding whether to refinance or perform a 1031 exchange on a rental property depends on various factors, including market conditions, investment goals, and tax considerations. Here’s a comprehensive look at when each option might be the best choice for you.

Refinancing Your Rental Property

Refinancing involves securing a new mortgage with different terms to replace an existing one. Here are scenarios when refinancing might be the right choice:

1. Improved Property Value and Low-Interest Rates

Refinance when your property’s value has increased, and interest rates are low, as this can lead to lower interest rates and reduced monthly payments.

2. Accessing Equity

If you’ve built up significant equity, a cash-out refinance can provide funds for property improvements, debt consolidation, or further investment opportunities.

3. Optimizing Cash Flow

Refinancing can improve cash flow by reducing monthly payments or changing loan terms.

4. Expanding Investment Portfolio

Refinancing can provide capital to invest in additional properties, helping to grow your rental portfolio.

5. Removing PMI

If the loan-to-value ratio has improved, refinancing might help remove private mortgage insurance, reducing expenses.

6. Tax-Free Cash

A cash-out refinance can provide tax-free cash since it’s considered a loan.

7. Market Conditions

With rising property values, it could be an ideal time to leverage accumulated equity through refinancing.

1031 Exchange for Rental Property

A 1031 exchange allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of an investment property into another “like-kind” property.

1. Tax Deferral

Perform a 1031 exchange to defer capital gains taxes, which can be significant.

2. Portfolio Upgrade or Diversification

Use a 1031 exchange to upgrade to a more valuable property or diversify your investments.

3. Adherence to IRS Rules

Ensure you follow the IRS’s timing rules for identifying and closing on replacement properties to maintain the tax-deferred status.

4. Avoiding Immediate Tax Liability

Be cautious of refinancing right before or after a 1031 exchange, as the IRS may view this as an attempt to access equity tax-free.

5. Long-Term Investment Goals

Consider a 1031 exchange if it aligns with your long-term investment objectives, such as cash flow, appreciation, or portfolio expansion.

6. Like-Kind Property Options

Understand the range of properties that qualify as like-kind to ensure compliance with 1031 exchange rules.

Choosing Between Refinancing and a 1031 Exchange

When deciding between refinancing and a 1031 exchange, consider the following:

  • Refinancing is generally best when you want to keep your current property, lower your interest rates, access equity, or change your loan terms for better cash flow or faster loan payoff.
  • 1031 Exchange is ideal if you’re looking to defer taxes on capital gains, upgrade or diversify your portfolio, or reinvest in a more valuable property.

Both strategies have their pros and cons, and the right choice depends on your individual circumstances and investment goals.


In summary, the decision to refinance or engage in a 1031 exchange should be based on a combination of market conditions, personal financial goals, and the specifics of your property. Refinancing can be a powerful tool for saving on interest, accessing equity, and improving cash flow, while a 1031 exchange can help defer taxes and facilitate portfolio growth or diversification. Carefully consider your long-term objectives and consult with financial advisors to determine the best path for your rental property investment strategy.


  • https://www.azibo.com/blog/rental-property-refinancing
  • https://fnrpusa.com/blog/1031-exchange-cash-out-refinance/
  • https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
  • https://themortgagereports.com/25521/cash-out-refinance-rental-property-guidelines-mortgage-rates
  • https://www.tylercauble.com/blog/1031-exchange-vs-cash-out-refi
  • https://blog.fgg1031.com/blog/real-estate-cash-out-refinancing-in-a-1031-exchange
  • https://www.realized1031.com/blog/what-are-the-rules-for-doing-a-1031-exchange-on-a-rental-property
  • https://www.kiplinger.com/real-estate/1031-exchange-do-you-know-your-like-kind-options

About the author

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK, and a capital investment company in Virginia USA..

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva, Switzerland, after the 2008 financial crash.

As an avid investor, especially in alternative investments, he runs this blog Altinvestor.net, sharing his growing experience and views on alternative investments. You can see Nathan's full profile at his personal website nathantarrant.com
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