Posted by Brian (UT) on January 12, 2006 at 05:44:15:
Craig
I don’t worry about hotshot IRS investigators when its such a established and allowed practice. If the IRS wants to change the rules they know how to get new rules in. And as an audit survivor I’m not worried about this activity.
As for seasoning, I don’t see any real problem and many lenders will agree to loan, after all this is not a new loan on the property that was just issued, the loans in an exchange are usually already existing and seasoned, and if a lender doesn’t agree so what, I would just find one that isn’t so dense.
As for your trust idea, selling off an interest would be a taxable event whether its hidden or not. And I would put that in the tax evasion catagory.
Cash out refi on a 1031 exchange - Posted by Joel David
Posted by Joel David on January 11, 2006 at 10:06:05:
Posted this on the Financing forum as well but just in case anyone has a bright idea here…
Is it possible/legal to do a 1031 exchange and then immediately refiance the mortgage on the new property to get some cash out? For example, a property is sold for 500K and you have 300K equity, you purchase a property for 600K. You put the 300K into it obviously, however, then you refinance it to 70% LTV or whatever is needed (we’ll use 70% for this example) so we have 300K equity in the new property, 70%LTV on 600K is 420K so could we in theory pull out the 120K (420-300) out of this thing. Is this possible or is it illegal?
Re: Cash out refi on a 1031 exchange - Posted by Brian (UT)
Posted by Brian (UT) on January 11, 2006 at 16:46:38:
Joel
Yes it’s legal, once the 1031 is complete and done right you can refinance, the IRS used to say you could do that one nanosecond later. But I would check with a company that handles 1031 exchanges as the intermediary, to be sure nothing has changed and your going to need one anyway if you do it. I haven’t done an exchange for a couple of years so maybe something was slipped in why I wasn’t looking.
Re: Cash out refi on a 1031 exchange - Posted by John Corey
Posted by John Corey on January 11, 2006 at 19:00:36:
See my reply to this thread in the legal forum. I have been advised by a tax attorney that you can not immediately refi as the IRS can look beyond the documents and classify the cash as boot and in effect void the 1031.
I was told there is no definitive ruling or statue so it might be a matter of opinion so ask a law firm trust or could sue to get some money back if the advice they offer is found to be faulty.
Re: Cash out refi on a 1031 exchange - Posted by Brian (UT)
Posted by Brian (UT) on January 11, 2006 at 21:07:05:
John
Need a new tax attorney. The phrase need to wait one nanosecond after the exchange is completed was uttered by the IRS.
As long as you fulfill the 6 elements of a 1031 exchange you will be ok.
Old and new property must be held for investment and be of a “like kind”.
2 Must provide a list of 3 or less replacement properties within 45 days of close of sale of old property.
Must complete the exchange in 180 days or less from the close of sale of the old property.
Cannot touch or have access to the money between the sale of the old property and the completion of the sale of the new property. Word of warning here is be sure you get a good qualified intermediary. There are no licensing requirements and a felon released from prison last week can set up shop. Plus another warning, always make sure the funds are deposited into a separate account by the intermediary. Many exchanges have been disqualified due to comingling of funds while in the hands of the intermediary.
Title must be held the same way on the new property the same way it was held on the old property.
To pay zero tax you must trade equal or up. And you must roll all the cash from the old property to the new property.
Your tax advisor may have said if you refinance your old property to soon before the exchange the IRS will consider that boot, and as far as I know they have never ruled what to soon is. But they did say you could refinance one nanosecond after you acquired
the new property. The 1031 expert will be aware of this and can advise Joel.
Re: Cash out refi on a 1031 exchange - Posted by craig (IL)
Posted by craig (IL) on January 11, 2006 at 20:54:08:
No for two reasons, but there is one way. First, as John Corey said, you would be in great danger of an hostshot IRS investigator deciding you have an illegal scheme and disallow the exchange. Secondly, your not likely to get any lender to give you money until you’ve seasoned the property for a year. You should have no problem cashing out after one year.
There is on way, admittedly a long shot but one way to get cash out quickly. After you exchange the property you can set it up in a land trust and then you can sell all or any percentage of you beneficial interest. Since this sort of sale s a trust operation, there is nothing recorded. Legally, no record for tax purposes. I say this is a long shot, because the deal would only involve private money, and anyone who would be intersted in the deal would only do it for a really good return. Problably not something you would want. Then, too, many people don’t understand trusts, and the idea would scare many investors away. So, this is a possibility but not likelihood.
Regarding #'s 2 and 5 that you mentioned…It is my understanding (and if I’m wrong, I would love clarification) that you can identify more than 3 properties…
3 properties of any value
Any number of properties not to exceed 200% of the relinquished value.
Any number of properties as long as 95% of the value of the properties identified is purchased.
And that yes, Title needs to be held the same way, but if you are an individual (or couple), you can sell and the replacements can be Titled in your Single Member, LLC and/or if your Single Member LLC sells, Title can be held in your new (or other)Single Member LLC.
I am also of the understanding that if you are planning to refinance that there is no problem right after you acquire the new property (and there are plenty of lenders who will do this w/out seasoning), but don’t even think about doing any type of cash out within 6 months prior to sale.