I was a little surprised today when I was discussing a 1031 Exchange with an Investor client of mine, and he told me that he didn't need to do a 1031 Exchange.  He said his loan officer allows him to refinance his place and told him to use up the equity loan so when the attorney calls for a payoff, his property is showing no or little profit.  Is this really legal?  Can't the IRS go back a year or something to see if a refinance has been done?

Vicki Watzlawick

Broker Owner, Exit Platinum Realty

Illinois Foreclosure Expert

847-854-3800 www.vickisdreamhomes.com

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10 Comments on 1031 Exchange Loophole

JUL
11
2007
 Sounds a bit shady to me.
12:16am • #1
115,168 Points 1 Featured Post Hit Router
Thanks Ray,  I'm hoping a few loan offices check in on this one.
12:18am • #2
3 Featured Posts
Vicki, he may use up his equity, but when he sells his property, the IRS is going to want to know what he bought it for, versus what he's sold it for.  You can't hide that.
6:45am • #3
115,168 Points 1 Featured Post Hit Router
Todd  He told me they never ask.  So when would they check on this?
8:39am • #4
3 Featured Posts
The closing attorney reports the HUD settlement statement to the IRS.  They know.
9:00am • #5
JUL
12
2007
Profit and equity are two totally different things.  Capital gain tax is based on profit.  Euity is reduced by refinancing which has nothing to do with profit.
marga shefman
8:23am • #6

I don't think the law is very clear on this one...

Sounds like a great idea, just refinance before 1031 and you can avoid a lot of boot and tax.

But it sounds too good to be true, I'm sure the IRS would come after you.

I would wait at least 2 years after refinancing before doing an exchange. 
3:45pm • #7
115,168 Points 1 Featured Post Hit Router

Todd   I know they fill out green sheets for the IRS, but I don't think they submit the HUDs to the IRS.  I'll ask one of my attornies.

Thanks Marga

Scott  Theres no need to do an exchange is what he is saying. 

9:58pm • #8
AUG
10
2007
I am a QI in the 1031 Exchange process.  You want to be VERY careful on these issues.  It is a no no to refinance BEFORE the exchange.  Let me know if there are any further questions.
Chris Princis
4:48am • #9
NOV
10
2007
127,872 Points Outside Blog

The loan officer, the client and some of those who have posted here are confusing equity in the property with the capital gain calculation.

Equity is the amount of net cash that you would end up with after selling the property, paying the closing costs, and paying the mortgage off.  It has absolutely no bearing on the capital gain computation. 

The capital gain (or profit) is computed by taking the gross sales price and subtracting the closing costs, the amount originally paid for the property and any capitalized improvements that have been made to the property. 

You can refinance and pull your equity out anytime you like, but it will not change your cost basis in the property.  The IRS will recharacterize the transaction as a sale, will assess interest from the date your client should have paid the taxes, and will more than likely assess a 25% failure to report and a 25% failure to pay taxes penalties as well. 

I would be happy to to a join conference call with you and your client to help them understand this if you like.

12:41pm • #10


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Vicki Watzlawick (Illinois Foreclosure Expert) (Vicki, Broker Owner, Exit Platinum Realty, IL foreclosures) Rainmaker_large

Vicki Watzlawick (Illinois Foreclosure Expert)

Algonquin, IL

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Vicki, Broker Owner, Exit Platinum Realty, IL foreclosures

Address: 9203 Route 31, Lake In The Hills, IL, 60156

Office Phone: (847) 854-3800

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Illinois REO Realtor and Broker Owner of Exit Platinum Realty. Number One recruiter and Number One in Sales Volume for the State of Illinois. 5 year Certified Foreclosure and Shortsale expert for Illinois foreclosures. Co-author "Should I Short Sale My Home?" www.vickisdreamhomes.com



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