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Should I refinance or use exchange 1031?
I have a single residence house for rent and it has positive cash flow after all the expensive including mortgage and property tax. My loan has a very low interest rate with 11 more years to go. I want to buy a multi-units apartment as an investment property. My question is should I refinance the existing loan to cash out some money and use that money to invest in the new property or should I just sell the house and use exchange 1031 to buy a new property? I don't know what to do because this existing proerty does generate positive cash flow (about $400 per month). Any idea will be helpful. Thanks
Section 1031 of the U.S. Internal Revenue Code allows investors to defer capital gains taxes on the exchange of like-kind properties. 1031, or tax-deferred, exchanges hold great advantages. Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties.
* Publication 544, Sales and Other Dispositions of Assets: http://www.irs.gov/publications/p544/index.html
* Form 8824, Like-Kind Exchanges (PDF): http://www.irs.gov/pub/irs-pdf/f8824.pdf
Section 1031 Exchanges: The Basics: http://www.realtor.org/libweb.nsf/pages/fg408#topica
If you sell and buy, you won't be able to defer any tax for the property you sold.
Since you are paying a low interest mortgage, take some time to think about how much on interest you will be paying for the new property. And how much will you be making grossly from renting out the multi-dwelling residential units.
I would consult a 1031 exchange specialist or a broker who knows what she or he is doing. 1031 exchange is not handled by all real estate broker, so make sure you talk to the SPECIALIST.
I suggest you let this investment stand alone since you have a positive and good cash flow on this one. Then look at the other investment strictly on its merits with a new loan and other expenses. If it looks good, then borrow against it and go for it.
Phil
Feel free to contact me via: http://www.slarson.com/contact or steve@slarson.com .
1031 exchanges and refinancing ?
Can I buy a property with a 1031 exchange then immediately refi the property to get my cash back out and still defer tax?
Yes, you can that is a exactly what I do.You will not have to pay Capitol Gains on a refi.
Good Luck
Real Estate Investor
First sell your current proptery.
Buy another for cash. Then take out a mortgage for your cash.
Yes you can buy a property and defer taxes, but are you aware of the guidelines?
Your residence is not eligible for 1031 treatment. Any other property that is not held for commercial, business, or investment purposes is also not eligible.
Section 1031 applies to capital gains taxes (15%), depreciation recapture (25%), and state income taxes (generally 8% to 9% where applicable). Long-term capital gains taxes apply to property held over 1 year – gains from property held less than a year are typically taxed as ordinary income.
You must contact a Qualified Intermediary before you sell your property, so that you can complete the appropriate documentation and structure the exchange.
Using a Qualified Intermediary is the most common way to receive ‘safe harbor’ protection for your 1031 Exchange.
A Qualified Intermediary must remain completely independent and cannot have been your agent in the past 2 years.
You have 45 days from the sale of your relinquished property to identify your potential replacement properties.
You have 180 days from the sale of your relinquished property by which you must close on the purchase of your replacement property/properties.
There are stirct guidelines on 45th or 180th day.
As a general principle, there are no extensions for either the 45- or the 180-day rules. However, the IRS has the authority to provide an extension to these deadlines. Recent examples of such extensions include the terrorist attacks of September 11, 2001 and recent hurricanes.
You may identify property in the following ways:
• 3-property rule: You may identify up to 3 properties without regard to their value.
• 200% rule: You may identify more than 3 properties provided that their combined fair market value does not exceed 200% of value of the relinquished property.
• 95% rule: You may identify any number of properties, provided that you acquire 95% of the fair market value of those properties.
In order to completely defer the applicable capital gains tax. To the extent you purchase a property of lesser value, you will be taxed on the difference.
You must use all cash proceeds from the transaction in order to completely defer the applicable capital gains tax. To the extent you do not use all your proceeds on the purchase, you will be responsible for any tax on the difference.
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