When to Refinance Your 1031 Property - A Contentious Issue Among Investors

By: Trisha Coppley

One of the key concepts behind the 1031 tax exchange process is that an investor cannot receive any cash benefit from the proceeds of the sale of his or her relinquished property; any cash removed from the sale is considered to be 'boot', and as a result it is subject to capital gains taxes. In accordance with this concept, the act of refinancing in order to remove stored value from the 1031 replacement property delves into a rather nebulous area in terms of acceptability under Section 1031.

In a case involving a property investor named Garcia, the court ruled that any benefit received by a taxpayer the refinance of a piece of property in advance of relinquishing it for a tax exchange will be deemed to be boot. This court decision represented the establishment of a standard for the way in which these kinds of issues. Currently, a more common tactic is to wait until after the closing on the replacement property, and to refinance the piece of property at some point afterward. This tactic, however, brings up some questions regarding how long one ought to wait before refinance and removing equity from a replacement property.

The most conservative of investors will advise you not to remove equity until a considerable time post-closing (maybe even as long as two years after), in order ensure that you are complying with the implicit meaning of Section 1031. The current trend among less conservative contingency of real estate investors, however, is to say that closing on a replacement represents the definitive ending point of to the 1031 procedure, and that one does not need to worry about the substantiation of the exchange after this point. For an investor who looks at the process from this perspective, it does not matter how long one waits before refinancing one's 1031 replacement property, and many will choose to do this directly after the closing has occurred.

If you are expecting any clear-cut rule as to when it is safe to refinance a replacement property, then you are destined to be disappointed, at least in regard to this article. The two perspectives described in this article are only the opinions of a few, and they represent only a few of the viewpoints an investor take. Investors vary a good deal when it comes to the way in which they choose to approach these types of gray areas, and the best advice that I am able to {impart is simply to enlist the help of a qualified tax adviser or other expert in making your ultimate choice, and to work together with him or her so that you can decide on the path that will be most effective in the context of your particular case.

Many Investment Properties Qualify For A 1031 Property Exchange. Be Sure To Consult With A 1031 Exchange Intermediary To Maximize Your Tax Savings. More Information Is Available At www.Top1031Exchange.com

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