This is a gray area of the law. In theory, it is possible to do a 1031 immediatly. The key here is that you have to show that you intended to hold the property long term as an investment.
Starker Exchange's advise is that the property must be put into service (rented) for at least one year. That means that if you fix it up for 6 months and then rent it for only 6 months they aren't as comfortable with it.
You can do whatever you want but if you get audited, you'll have to convince the IRS guy/gal that when you bought it you really were planning to keep it.
There is some misleading advice here, so be careful.
The amount of time between your refinance and the actual sale IS relevant.
The preamble to Section 1031 of the Treasury Regulations actually has language regarding "refinancing in anticipation of a 1031 exchange" and the actual refinance just prior to the 1031 exchange will be considered a step transaction and result in the disallowance of your 1031 exchange transaction.
If the investor has time, the best approach would be to refinance the property and then wait at least six months - if not more - before selling the property. The longer the better. Or, the investor can complete the 1031 exchange and refinance the replacement property after the fact.
However, just keep in mind that refinancing the property to pull cash out just prior to a 1031 exchange will result in your 1031 exchange being disallowed.
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Bill Exeter[ Edited by wexeter on Date 08/22/2004 ]
Yes, I don't want refi immediately before 1031. However, I'm thinking of possible doing refi in September 04 and selling summer 05. This would be about 9 months.
Sounds like 6 months would be a minimum, so 9 may be OK. However, I guess the key is establishing independence between the two events.
The time frame after the refinance is irrelevant. How long have you owned the building?
This is a gray area of the law. In theory, it is possible to do a 1031 immediatly. The key here is that you have to show that you intended to hold the property long term as an investment.
Starker Exchange's advise is that the property must be put into service (rented) for at least one year. That means that if you fix it up for 6 months and then rent it for only 6 months they aren't as comfortable with it.
You can do whatever you want but if you get audited, you'll have to convince the IRS guy/gal that when you bought it you really were planning to keep it.
There is some misleading advice here, so be careful.
The amount of time between your refinance and the actual sale IS relevant.
The preamble to Section 1031 of the Treasury Regulations actually has language regarding "refinancing in anticipation of a 1031 exchange" and the actual refinance just prior to the 1031 exchange will be considered a step transaction and result in the disallowance of your 1031 exchange transaction.
If the investor has time, the best approach would be to refinance the property and then wait at least six months - if not more - before selling the property. The longer the better. Or, the investor can complete the 1031 exchange and refinance the replacement property after the fact.
However, just keep in mind that refinancing the property to pull cash out just prior to a 1031 exchange will result in your 1031 exchange being disallowed.
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Bill Exeter[ Edited by wexeter on Date 08/22/2004 ]
Thanks Bill,
Yes, I don't want refi immediately before 1031. However, I'm thinking of possible doing refi in September 04 and selling summer 05. This would be about 9 months.
Sounds like 6 months would be a minimum, so 9 may be OK. However, I guess the key is establishing independence between the two events.
You are right on the money!
[addsig]