Things Property Investors Should Consider During a Tax Exchange

One of the most essential concepts in the 1031 tax exchange process is that an investor must not draw any direct benefit from the proceeds of the sale of a 1031 property; any kind of monetary benefit 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 your 1031 replacement property enters into a quite gray area in terms of compliance with Section 1031. In a case brought against a real estate investor by the name of Garcia, the court clearly asserted that all benefit gained by a taxpayer resultant from the refinancing of a piece of real estate in anticipation of selling it in a tax exchange will be deemed to be boot. This court decision represented the establishment of a precedent for the way in which these sorts of situations. As of today, a more popular strategy is to wait until the replacement property has been closed on, and to refinance the piece of property at some point afterward.

This strategy, however, brings up the issue of how long one ought to wait before refinancing and taking value from a property. The most conservative investors will advise you that you should wait a considerable period of time after closing (maybe 2 years), in order to make absolutely certain you're complying with the intent of 1031. The current trend among less conservative school of property investors, however, is to say that the closing on a replacement property represents the definitive ending of to the exchange process, and so one does not need to fret over the substantiation of the exchange from there onward.

To an investor who looks at the exchange process from this perspective, it doesn't matter how long one waits before refinancing a 1031 replacement property, and many do indeed elect to do this immediately after the closing . If you are hoping for any kind of definitive maxim as to when it is safe to refinance a 1031 replacement property, you are destined to be disappointed, at least within the confines of this article. The two perspectives that I have described above are only the opinions of a few, and represent extremes on a wide spectrum. Investors vary greatly in the way in which they look at these types of legally gray areas, and the most helpful suggestion I can {impart is simply to speak with a good tax adviser or other expert in making your ultimate decision, and to work together with him to figure out the path that will work best in light of your particular situation.

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


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