Getting Cash Out & A 1031 Exchange
I'm just in the process of selling a property. Never done a 1031 before, so this is new to me. I'm intersted in taking the proceeds into another property BUT I want to keep some of the proceeds for capital improvements, working capital, "buffer money", etc.....
What (if any) is the best way to pull money out tax free to use for these purposes??? I've got a few ideas, but would love to hear what some of you would recommend.
To get a 1031 right you need a facilitator that has experience with such deals.
To pull cash out you can refinance.
You just need to make sure that you are meeting the multiple criteria of a 1031 before you worry about the cash you might pull out.
John
[addsig]
If you are keeping the monies in play and not cashing out, why not go with a self directed real estate IRA instead?
Just a thought,
Kyle
Kyle,
Would you mind expanding on the implications (tax and otherwise) of using a self-directed IRA. Do you use it with a 1031 exchange or instead of a 1031?
Who would I consult for help with the self directed IRA? Is that something an accountant or lawyer generally handles?
Thanks for your thoughts.
Dave
To do a self directed IRA you would first choose a third party that would handle the funds. Preferably a lawyer or investment firm as you will have to stay legally separate from the monies until retirement age. There are reputable smaller firms that are doing it now, but you will want someone you can trust, as they will have access to your funds since they will be the overseer of your account and signing off on where you want your monies to go for each transaction.
Then it would be set up sort of like a business with its own entity, and its job would be to invest in real estate related transactions for your retirement. Then any monies realized both at the sale and during the rental periods (if any) would be paid to the Hibby self directed IRA fund.
The good part is that while the monies are waiting they can be in an interest bearing account, and you will have a longer period to shop before you have to purchase something. Also you will be able to get all of it tax free until retirement. Since it is a self directed Real estate IRA, you can invest in any real estate transaction, such as interest bearing notes to a Hibby International for his purchases of real estate, Or equity loans to HibbyCorp for his commercial equity. etc etc Just make sure that the check does not go to Hibby, only to the seller Who is not Hibby or his relatives.
The bad part is that you cant easily pull the monies for anything else without paying income tax. No management fees to Hibby either. Also dont forget you will be paying someone to manage the account, but it will be less than income tax if the monies coming in and/or being managed are over 100K. I say 100K because that would put you in the 30% income tax bracket.
Just remember that the Hibby fund cannot lose money helping out Hibby, its purpose is to grow and show a profit every year. As long as you do that you shouldnt raise any red flags.
Good Luck,
Kyle[ Edited by KyleGatton on Date 07/20/2004 ]
To the extent that you receive cash (boot) in addition to like kind property in your 1031 exchange you will have to recognize taxable gain.
Consult your tax professional to advise you prior to your sale.
You can not "cash out" during a 1031 exchange transaction. In order to defer 100% of your capital gain you must trade equal or up in sales price and reinvest 100% of your net cash proceeds. If you pull any cash out it will be cash boot and probably taxable. The only way to pull cash out tax free when dealing with a 1031 exchange is to complete your 1031 exchange and then refinance the property a little while later.
[addsig]
Hibby-
I have found Guidant Financial to be quite helpful with the self-directed IRA process, if that is the way you should choose to go. I know this doesn't answer your 1031 exchange question, but I believe the posts just before mine directly answers your 1031 question. "Tax-deferred" seems to be the locus of your question, so a self-directed IRA may be the way to go if you can live with not touching the proceeds until you're 59 1/2. It will at least solve your tax-deferred problem.