Property Investors - Refinancing With a 1031 Exchange

One of the key concepts in the 1031 tax exchange process is that an investor cannot receive any direct benefit from the proceeds of the sale of a 1031 property; any cash removed from the transaction is considered to be boot, and as a result it is, in fact, liable for capital gains taxes. In keeping with this logic, the act of refinancing in order to remove stored value from your replacement property delves into a very nebulous area in terms of acceptability under Section 1031.

In a case brought against a property investor named Garcia, a tax court made it clear that all benefit gained by an investor the refinance of a property in anticipation of relinquishing it for an exchange will be considered to be boot. This decision set a precedent for the manner in which these kinds of issues. Currently, a more common tactic is waiting until after the replacement property has been closed on, and to refinance at some point afterward. This strategy, however, brings up the question of how long one ought to wait before performing this refinance and removing value from a replacement property.

The most conservative of investors will advise you not to refinance until a considerable time post-closing (perhaps even as long as two years after), in order to make absolutely certain you are in compliance with the intent of Section 1031. The recent trend amongst more liberal-minded contingency of property investors, however, is to assume that the closing on the purchase of a replacement marks a definite end to the 1031 process, and so an investor need not worry about the substantiation of the exchange after this point. To an investor who perceives the exchange process from this perspective, it is not relevant the amount of time one waits before refinancing a 1031 replacement property, and many investors will elect to do this right after the closing has occurred.

If you are expecting any hard and fast maxim as to when you ought to refinance a replacement property, you are destined to be disappointed, at least within the confines of this short article. The schools of thought that I have described in this article are only the opinions of a few, and they are examples of the extreme edges on a wide spectrum. Real estate investors vary a good deal in how they elect to approach these sorts of legal gray areas, and the most helpful advice I am able to {give you is simply to look to qualified tax adviser or other legal expert in formulating your ultimate choice, and to work together with him so that you can figure out the path that will work best in the context of your particular case.

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Many Types Of Investment Property Qualify For A 1031 Tax Exchange. Be Sure To Consult With An Expert That Offers 1031 Exchange Services To Maximize Your Tax Savings. More Information Is Available At www.Top1031Exchange.com

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