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

A central concept in the 1031 tax exchange process is that an investor is not allowed to draw any direct benefit from the proceeds of the sale of his or her 1031 property; any kind of monetary benefit from the sale is seen as boot, and this means, in fact, subject to capital gains taxes. As a result of this logic, refinancing in order to remove stored value from your 1031 replacement property delves into a quite nebulous area in terms of compliance with Section 1031.

In a case involving an investor by the name of Garcia, the court ruled 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 exchange will be considered to be boot. This court decision represented the establishment of a standard for dealing with these kinds of situations in the future. As of today, a more common tactic is to wait until after the closing on the replacement property, and to refinance at some point later. This practice, however, brings up some questions about how long one ought to wait before performing this refinancing and removing equity from your property.

The old guard among investors would likely tell you that you should wait a considerable period of time post-closing (maybe even two years after), in order to make absolutely sure that you are complying with the intent of Section 1031. The recent trend amongst less conservative contingency of property investors, however, is to say that the closing on your replacement marks the definitive ending of to the 1031 process, and so one need not fret over the substantiation of an exchange after this point. To an investor who looks at the exchange process from this vantage point, it does not matter the amount of time one waits before refinancing a 1031 replacement property, and many will elect to do this directly after the closing has occurred.

If you are expecting any kind of definitive maxim as to when it is safe to refinance your 1031 replacement property, then you are destined to be disappointed, at least within the confines of this short article. The perspectives discussed here are only opinions, and represent the extreme edges on a wide spectrum. Property investors vary greatly when it comes to the manner in which they elect to approach these types of legally gray areas, and the most helpful suggestion that I am able to {give you is simply to speak with a good tax adviser or legal expert in formulating your ultimate choice, and to work closely with him or her so that you can decide on the approach that will work best 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 http://www.Top1031Exchange.com