What Real Estate Investors Need to Know About Refinancing 1031 Properties

One of the most essential concepts in the 1031 exchange process is that a property investor is not allowed to draw any direct benefit from the proceeds of the sale of his or her relinquished property; any cash removed from the transaction is considered to be boot, and this means, in fact, liable for capital gains taxes. In keeping with this concept, refinancing for the purpose of removing stored value from the 1031 replacement property delves into a quite gray area with regard to acceptability under Section 1031.

In a case brought against an investor by the name of Garcia, the court ruled that any benefit received by an investor the refinancing of a piece of property in anticipation of relinquishing it for a 1031 exchange will be considered to be boot. This decision set a standard for dealing with these kinds of situations in the future. As of now, a more popular strategy is to wait until after the closing on the replacement property, and to refinance at some point later. This practice, however, raises some questions regarding how long it is appropriate to wait before refinancing and removing value from a replacement property.

The old guard among investors would likely tell you not to refinance until a considerable time after closing (perhaps even 2 years), to make absolutely certain that you are in compliance with the implicit meaning of Section 1031. The popular mindset amongst the more liberal-minded contingency of property investors, however, is to say that the closing on the purchase of a replacement marks the definitive ending of to the exchange procedure, and so an investor does not need to worry about the substantiation of the exchange from there onward. To a property investor who sees the exchange process from this perspective, it doesn't matter how long one waits to refinance one's 1031 replacement property, and many investors will elect to do so right after the closing .

If you're looking for any clear-cut rule as to when you ought to refinance a replacement property, then you are doomed to disappointment, at least in regard to this short article. The schools of thought that I have discussed in this article are just the opinions of a few, and represent extremes on a wide spectrum. Property investors vary greatly in how they approach these sorts of legally gray areas, and the wisest suggestion that I am able to {give you is simply to consult with a good tax adviser or legal expert in formulating your ultimate decision, and to work together with him in order to decide on the path that will be most effective in light of your particular situation.

Article Source: http://www.rightarticle.com

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

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated