One of the most essential concepts behind the 1031 exchange process is that a real estate investor is not allowed to receive any direct benefit from the proceeds of the sale of his or her 1031 property; any money removed from the sale is considered to be 'boot', and this means liable for capital gains taxes. As a result of this logic, refinancing for the purpose of removing stored value from the replacement property enters into a rather nebulous area in terms of acceptability under Section 1031.
In a case brought against an investor named Garcia, the court ruled that all benefit received by an investor the refinancing of a real estate in anticipation of selling it in a 1031 exchange will be considered to be taxable boot. This court decision set a standard for the manner in which these sorts of situations. As of today, a more popular strategy is waiting until after the replacement property has been closed on, and to refinance at some point afterward. This practice, however, brings up the issue of how long it is appropriate to wait before refinancing and removing equity from your replacement property.
The old guard among real estate investors will likely advise you not to refinance until a considerable time after closing (perhaps 2 years after), ensure you're in compliance with the implicit meaning of 1031. The current trend among the more liberal-minded contingency of investors, however, is to say that the closing on your replacement represents the definitive ending of to the exchange process, and so one does not need to fret over the substantiation of an exchange after this point. To a real estate investor who sees the process from this vantage point, it is irrelevant the amount of time one waits to refinance a 1031 replacement property, and many do indeed choose to do so immediately after the closing has taken place.
If you are expecting any hard and fast rule as to when you ought to refinance your 1031 replacement property, you are doomed to disappointment, at least within the confines of this article. The two schools of thought discussed in this article are only opinions, and they are examples of only a few of the viewpoints an investor take. Investors vary greatly in how they choose to approach these sorts of legally gray areas, and the best suggestion I can {give you is just to consult with a qualified tax adviser or legal expert in formulating your ultimate choice, and to work together with him or her so that you can decide on the approach that will be most effective in the context of your specific 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
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