Legal Notes

Help with 1031 exchanges in Gulf Shores

Let Herbert Law Firm LLC help you with 1031 exchanges in the Gulf Shores area. Our office has experience in this arena and we can assist you with all the fine print. There are many different things to know when it comes to 1031 exchanges, and we are happy to share our knowledge with you. We also are able to help with other types of real estate law. Our blog, below, has some information you may find useful. Please check back often to see updated material. Call us to make an appointment any time. 
By Berry - D1 test account (Spotzer) 08 Apr, 2016
Take a look at this YouTube video. The lady explains that in a 1031 one “rolls the gain” over into a new property to defer the recognition of gain. Starting with a $500,000.00 property with $300,000 in “equity” — which presumably is the original down payment and some as yet unrecognized capital gain — she speaks of “taking all the equity” and rolling it into a new property. It certainly sounds like she is suggesting exchanging into a $300,000.00 property and paying off the $200,000 (“non-equity”) mortgage on the relinquished property. But if you do that you will have received “cash boot” in the amount of $200,000.00 (represented by the forgiveness of the debt secured by the mortgage) which is as fully taxable as if you had actually received cash. To avoid this, one must replace the old debt with new debt (or cash) and exchange into a property worth at least $500,000.00.   Read my summary on how to structure a 1031 exchange.
By Berry - D1 test account (Spotzer) 08 Apr, 2016

Although 1031 Exchanges are primarily used to shift our equity from one property to another, there are ways of recovering some of that equity for use as leisure or further investment purposes.What is not customarily known is that you can use some of the equity from your property through proper refinancing. However, in theory there are two ways to use this premise and cash out some of your equity: pre-exchange refinancing, and post-exchange refinancing.  Only one way works.

The exchange rationale requires all of the proceeds from the sale of the relinquished property to pass to the Qualified Intermediary. But, suppose you want that new car or want to take the family on a vacation and don’t have the cash to do it. So, you decide to refinance your property shortly before the 1031 exchange and use that equity for your desired luxury item.  A good decision? Probably not, according to IRS v. Garcia.
In IRS vs. Garcia, it was decided that Garcia when refinancing his property in anticipation of the 1031 exchange, should have paid taxes on the money not used on the new property. The IRS successfully argued that when Garcia took out money before the 1031, it was akin to telling the settlement agent to pay him some of the sale proceeds at closing. In short, you cannot take out your equity just before the 1031 exchange. The ‘boot’ is acceptable only if you pay taxes on it or cash out equity. Garcia tried to avoid the tax and ran afoul of the 1031 rationale, and the IRS.
Refinancing the replacement property is a way of avoiding the Garcia issue. This is where post-exchange financing comes into play. Not all taxpayers want to leave their equity in the replacement property – some want to take out that equity and buy more real estate. But, how long should you wait after completing the 1031 exchange before you take out the equity in the replacement property? Some say wait a nanosecond.
The nanosecond refinance is waiting just long enough after the 1031 to show the IRS, through the closing statement, that you’ve re-invested all of your equity into the replacement property. In a separate transaction, a new statement is used to show that the replacement property is encumbered with new debt via a loan or mortgage. Thus, there is a pool of money you can access after the tax exchange.

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