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Real Estate Investors - Refinancing With a 1031 Exchange

By: Trisha Coppley

An essential concept behind the 1031 exchange process is that a property investor cannot draw any direct benefit from the proceeds of the sale of a relinquished property; any cash removed from the sale is considered to be 'boot', and as a result it is, in fact, liable for capital gains taxes. In accordance with this concept, the act of refinancing in order to remove stored value from your 1031 replacement property delves into a quite gray area in terms of compliance with Section 1031.

In a case brought against a property investor named Garcia, a tax court made it clear that any benefit received by an investor the refinance of a property in advance of selling it in a 1031 tax exchange will be considered to be boot. This court decision set a standard for dealing with these kinds of situations in the future. As of now, a more common tactic is to wait until after the replacement property has been closed on, and to refinance at some point afterward. This tactic, however, brings up some questions about how long it is appropriate to wait before refinance and removing value from your property.

The old guard among real estate investors would tell you not to remove equity until a considerable time after closing (maybe even as long as 2 years), ensure that you are in compliance with the implicit meaning of Section 1031. The recent trend among more liberal-minded contingency of property investors, however, is to assume that closing on the purchase of your replacement property represents a definite end to the exchange procedure, and so one need not worry about the substantiation of an exchange from there onward. To a property investor who sees the exchange process from this vantage point, it is not relevant how long one waits before refinancing a 1031 replacement property, and many investors will elect to do so directly after the closing .

If you are expecting any hard and fast maxim as to when it is safe to refinance your replacement property, then you are destined to be disappointed, at least within the confines of this short article. The schools of thought discussed in this article are just opinions, and they represent only a few of the viewpoints an investor may take. Property investors vary a good deal in the manner in which they approach these sorts of gray areas, and the best suggestion that I can {give you is just to consult with a qualified tax adviser or other expert in formulating your ultimate decision, and to work closely with him to decide on the approach that will work best in light of your specific situation.

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

About the Author:
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 http://www.Top1031Exchange.com

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