1031 Exchange - How do you Refinance Out ?? - Posted by Frank Chin

import · January 18, 2001, 4:59pm

Posted by David Krulac on January 18, 2001 at 18:10:30:

Frank,
the IRS refers to cash as boot, for maximum tax deferal don’t get cash. One way that this often occurs in a 1031 exchange is for the seller to re-finance the losing property before the exchage, as borrowed money is not taxable. In you example borrow another $160,000 or what ever you can before the exchange.
hth
David Krulac

import · January 18, 2001, 4:59pm

Posted by Frank Chin on January 18, 2001 at 17:59:41:

I recently signed a Sales Contract for one of my properties:

Price: 425K
Mortgages: 140K
Selling Expense: 25K

For 1031 exchange purposes I have: Cash out 260K

I located a replacement property as follows:

Small shopping strip: 600K
Owner will finance 70%: or 420K

Question:

Is it possible to do this at closing:

A- Pay from 1031 escrow fund: 260K
B- Take mortgage from seller: 420K
C- Walk away with 80K (refinance out)-presumably a check from the seller as the above exceeds purchase price by 80K

Or do I have to do the following:

A- Pay from 1031 escrow fund: 260K
B- Take mortgage from seller: 340K

Complete above transaction for IRS purposes - then

A- Seller pay me back 80K
B- Cancel the 340K note and replace with 420K note.
C- I walk away with 80k check from seller.

Thanks in advance for any feedback.

import · January 18, 2001, 6:30pm

Re: 1031 Exchange - How do you Refinance Out ?? - Posted by JPiper

Posted by JPiper on January 18, 2001 at 19:30:46:

I wouldn’t have the seller pay to back $80K.

You could of course put the extra cash into your deal, thereby lowering your mortgage. Or better yet, why don’t you just go find another property with the $80K???

Identify a second property, leave the $80K in the intermediary until you’re ready to close.

JPiper