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1031 Strategies: Refinancing Around An Exchange

For investors, one of the main reasons to use a 1031 exchange is deferring any tax due so that any return they earn can be on all of their equity going forward. For the gain deferral to be maximized, the exchange rules require that the purchase price of the replacement property be the same or greater than the property that was sold  and all of the cash proceeds be used . When there is little to no debt on the property, this can be particularly vexing to investors who would like to enjoy a bit of their hard earned equity or employ it into a new venture. Logically, many would like to at least get back their initial down payment or capital contribution, but the requirements of a 1031 make that difficult to do directly. Because any gain is “top end loaded”, the first cash received by the investor from the sale is considered gain--- and is taxable. Is there a way to maximize the benefits of a 1031 while still freeing up a bit of equity?


Question Corner

As the QI, what information do you file with the IRS regarding my exchange?


Nothing. You or your tax professional would use IRS form 8824, "Like-Kind Exchanges". Usually, you would report the transaction in the year the relinquished property was sold. Some of the information required includes a description of the properties sold and acquired and the date of your ID letter. Additionally, the form will ask if a related party was involved in either the sale of the relinquished property or the acquisition of the replacement property. Reporting requirements are further outlined in IRS publication 544.
Understanding Exchange Terminology
Things You Need to Know
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Ron Raitz, CCIM - President

Building ADE with a foundation of educating others on 1031 exchanges, Ron offers continuing education courses for professions which include CPAs, attorneys, realtors, and investor groups. He is also a lecturer in academia at GSU, Mercer Law, Georgia Tech and Emory's graduate real estate programs.