How To Recoup (tax Free) Expenses Used To Fix A Property Before Selling With 1031
I'll be selling a SFR through 1031 but need to make some needed repairs before this.
However, I want to minimize the expenses out of pocket since I won't recoup them tax-free after the sale.
How can I best do this with a 1031?
I am not sure exactly what your concern is with regards to taxes. If this is wide of the mark then perhaps you can clarify. If the expenses are immediately deductible then they can be deducted in the year they are incurred, if they must be capitalized, then they would be added to the basis of your current property which will be passed through to the replacement property via your 1031.
If you are trying to finance out your expenses, that is a different matter. Most would finance from the replacement property and that is probably the cleanest. Financing from the relinquished property always brings up the issue of creating boot, however, if the purpose is to make repairs on the existing propertty, you may be OK. I would check with a Qualified Intermediary on this. Bill Exeter is quite knowledgeable on 1031s and hopefully he will respond to your post.
There is no way to pull the cash out during the 1031 exchange process. Ed is correct in that refinancing just prior to the 1031 exchange could create taxable boot. The best way to structure this is to pay cash up front, complete your 1031 exchange and then refinance the property after the 1031 exchange has been completed and pull cash out tax free. You can always pull some cash out at the close of escrow to reimburse you for these costs, but it will be taxable.
[addsig]
Thanks for the info. Unfortunately, it is a little disappointing.
Clearly I was hoping to avoid spending ~10K cash up-front. I understand that I could refi the acquired property and to get the cash back but then of course I'd have a payment. Of course, if the neq purchase is right, this should easily be paid by the new cash flow.
Nevertheless, ideally I would have this funded through the 1031 since the 10K would be exclusively for repairs on the property to be relinquished. The idea here, is that the intent is not to create "boot" but to cover expenses directly applicable to the relinquished property.
THANKs
Add an addendum to your sale agreement to give the buyer of your replacement property a seller concession of $10K for repairs. This can be handled at settlement and reduces the net sale proceeds to you.
Rather than recovering your repair costs, you don't make them in the first place. Though you reduce your net sale proceeds, your bottom line is still the same and you avoid taxable boot.