Refinance A 1031 - Tax Consequences?
I sold two properties and put the proceeds into a 1031 and then bought another property with the 1031 money. I now want to refi the property to get some of my money out. What are the tax consequences of this? I am planning on holding the property for several years.
There are no tax consequences when you refinacne your property. You can refinance and pull cash out of your property with incurring any income tax consequences.
The issue here when there is a 1031 exchange involved is whether you had the INTENT to REINVEST your proceeds in replacement property or whether you really intended to cash out. The question is how long do you need to wait before or after your 1031 exchange before you refinance. There is no clear cut answer yet. We are still waiting for some type of ruling or clarification from the IRS.
Our recommendation is that if you are refinancing before your 1031 exchange that you refinance and then wait at least six (6) months before you structure your 1031 exchange transaction. If you are refinancing after your 1031 exchange transaction like you are doing, then we recommend that you wait 60 to 90 days before you begin the refinance process.
There is a Private Letter Ruling (PLR) from the IRS where the Investor refinanced the week after he completed his 1031 exchange transaction. The PLR was not specifically addressing the refinance issue, but they did allow it. You have to be careful though because PLRs can not be relied on by other Investors, which is why we recommned waiting 60 to 90 days to play it safe.
[addsig]
Thanks for the reply.
Another question - and I know it is more complicated than this - but here goes
I sell a house1 and get 60k in proceeds. I have the money put into a 1031. I buy a house2 and use the entire 60k. I then refinance the house2. Then I sell house2 and get 10k in proceeds. I have the money put into a 1031. Then I buy house3 with the 10k.
What are the tax consequences of the 1031 in the previous example?
It depends on a number of factors including, the debt relieved and assumed or taken on in the exchaged property and what you did with the money you take out when you refi. A lot more info. is needed to answer the question properly. If you read a response that Newkid wrote to a 1031 question a couple days ago, you can probably apply the answer to your facts to find your answer.