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Property Investors - When it Is and Isn't Okay to Refinance Your 1031 Exchange

One of the key concepts behind the 1031 tax exchange process is that an investor must not receive any direct benefit from the proceeds of the sale of a 1031 property; any kind of cash benefit from the sale is seen as 'boot', and this means, in fact, subject to capital gains taxes. In accordance with this logic, refinancing in order to remove stored value from the replacement property enters into a rather gray area with regard to acceptability under Section 1031.

In a court case brought against a real estate investor named Garcia, a tax court made it clear that any benefit received by a taxpayer as a result of the refinancing of a real estate in anticipation of relinquishing it for a 1031 tax exchange will be deemed to be taxable boot. This court decision set a precedent for the manner in which these sorts of situations. As of today, a more popular strategy is waiting until after the closing on the replacement property, and to refinance the property at some point later. This tactic, however, raises the question of how long it is appropriate to wait before refinancing and removing value from a replacement property.

The most conservative investors would likely advise you to wait a considerable period of time post-closing (perhaps even as long as two years), in order ensure you're complying with the implicit meaning of Section 1031. The popular mindset among the less conservative school of investors, however, is to assume that closing on the purchase of a replacement property represents a definite end to the exchange process, and so an investor need not fret over the substantiation of the exchange after this point. To an investor who perceives the exchange process from this vantage point, it is irrelevant how long one waits to refinance one's 1031 replacement property, and many investors do indeed elect to do so right after the closing has taken place.

If you are hoping for any definitive maxim as to when you ought to refinance a replacement property, then you are doomed to disappointment, at least within the confines of this article. The two perspectives described here are merely opinions, and represent the extreme edges on a wide spectrum. Property investors vary a good deal when it comes to how they elect to approach these sorts of legally gray areas, and the best advice I can {give you is just to look to good tax adviser or other legal expert in making your final decision, and to work together with him to figure out the approach that will work best in light of your specific situation.

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

Section 1031 Exchange (Of The IRC) States That Property Investors Can Use A 1031 Property Exchange When Selling And Buying Like Kind Investment Property. To Find Out More Visit www.Top1031Exchange.com

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