As many investors know. A 1031 exchange is a way to roll the gains of selling one investment property into another investment property of "like-kind". This method allows the investor to defer paying capital gains on the profits from selling the investment property. 
Taxes are not paid on the gains until the the investment property is sold without rolling it into another investment and the investor opts to take the proceeds as cash.
Well, what if you need to get access to this money, but don't want to pay taxes on it. There is a real estate loophole that allows you to take out a loan on the property that you receive after a 1031 exchange. In other words, do the 1031 exchange, get the new property, and then refinance. This will allow you to access the gains without immediately paying taxes on it. Of course once this property is sold and the proceeds taken as cash, you will have to pay taxes on the money taken out during the refinance.
Please consult your tax professional about this loophole to learn the exact procedures to follow.
Bellevue, WA
Victor, this is a great suggestion and one that I think a lot of people find helpful. Thank you.
Mar 15, 2007 07:08 AM
The Manor Enterprises - Washington, DC
www.HouseWealthy.com
Thanks Caleb, there are many loopholes out there for maximizing real estate investments. Knowing the right things can save thousands of dollars.
Mar 16, 2007 02:24 PM
Auction Brokers & Investors United - Baltimore, MD
I did four 1031's last year. This is a great way to refine your real estate portfolio. The great thing about an exchange is that the money you save the transaction will allow you to pay retail (not recommended however) for the replacement property and still create an equity profit.
Another way to pull cash out of the replacement property is to create a note and sell it at a discount. Or create a note and use it as a down payment to purchaese another property, but ask for cash back at settlement.
Charles Parrish
Mar 17, 2007 12:16 PM
Ad Astra Realty - Olathe, KS
Kansas City Real Estate Investing
I am very aware of this strategy and I am also very aware that the IRS is very aware. I'm not trying to throw cold water on the idea but many a tax attorney will tell you "intent" can be weighed and measured and therefore void the exchange.
Of course, talk to YOUR tax advisor. But this is what I've been told a couple of different times. As I understand it, there is no ruling at this time on the issue. I just would be aware.
Mar 17, 2007 03:02 PM
THE PODGURSKY GROUP @ Re/Max Direct - Boynton Beach, FL
THE PODGURSKY GROUP - Make the Right Move!
good point... the only issue is that you REALLY need to have that discussion early in the process because if you don't take the loan out in the right way, you don't benefit from acquisition indebtedness...
plus, this is assuming that you're not stepping up in property cost basis which would already involve a loan for leverage
Mar 18, 2007 02:45 AM
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert
Investors should always have their "real estate team" lined up well in advance so that they are ready to deal with any opportunity or challenge that might come their way. Don't wait until you NEED a real estate advisors. Gather your team early. Your team should be a good Realtor that knows and understands the market and asset class that you are looking at, a good real estate attorney, a good tax advisor (CPA or tax attorney), a good settlement agent, a good appraiser, and a good 1031 Exchange Qualified Intermediary.
Nov 19, 2007 05:10 AM
Rainer
9,273
9,273
Victor Emeli
www.HouseWealthy.com
Comments(6)