1031 And Then Refinance?
Is it legal to do a 1031 exxchange, put down 20% (all your net proceeds) and then refinance to get half the 20% out?
Is it legal to do a 1031 exxchange, put down 20% (all your net proceeds) and then refinance to get half the 20% out?
I am not sure what state you are in, but if you are qualifying for a conventional mortgage, there is no seasoning requirement. This means that you don't have to have the loan or own the home for less than 12 months. The only glitch here is if you are trying to get a second mortgage on the property. The second mortgage banks do have seasoning and will only use the purchase price as your appraised value even if you bought the home at a great deal.
Most refi's want you to have owned the home for a certain period of time. Many of those that will do a refi the day after purchase, will only refi a certain percentage of the appraised value (Loan to value - LTV). 75% is common. You can get a higher percentage if you pay points on the refi.
Brenda
Ok, let me try to explain my self better. Let's say I relinquish a property and have $20,000 in net proceeds, turn around and do a 1031 exchange. I must put 100% of the net proceeds into the new property to defer all capital gaines taxes. If I qualify for a 90% LTV loan and buy a property for 100K I will have put down 20%. Can I then refinance to get 10% cash out? This will still leave me with 90% LTV. Will I then be liable for capital gains on the 10% I take out?
No problem doing a cash out refinance after your 1031 exchange has closed if you can find a lender who will do a cash out refi at 90% LTV on a non-owner occupied property. If you are successful, there is no tax liability on the $10K you take out.
If the amount of profit you are trying to shelter with a 1031 exchange is only $20K or less, you have to ask yourself what the capital gains tax will be on that amount without the exchange.
Next ask how much the cash out refinance will cost in loan fees and settlement costs. When you add this cost to the 1031 exchange fees you will pay, I wonder if there is really any savings vs paying the taxes.[ Edited by NewKidinTown2 on Date 01/11/2005 ]
Just to throw my two cents in. There are really two ways to refinance a property when involved with a 1031 exchange transaction - either WELL before the 1031 exchange or AFTER the 1031 exchange. You never want to refiance immediately prior to the 1031 exchange because the IRS will consider it to be a "step" transaction and will consider it money pulled out and taxable. There is a private letter ruling out where the gentlemen refinanced immediately AFTER completing his 1031 exchange transaction. I would wait 30 to 60 days after the 1031 exchange closes to be a little more conservative. Never start the refiance application process during your 1031 exchange. Keep in mind, most of the 1031 exchange regulations revolves around your INTENT.
[addsig]
So I guess the other way to avoid capital gains taxes besides a 1031 is to refinance and cash out, even if one is not planning to sell the property? That's a loophole I never really thought of.