Financial Information

We all know that the 1031 Exchange is used for transferring equity from an old property to a replacement property. In effect, the old debt is being offset by the new debt on the replacement property. You can use pre-exchange refinancing or post-exchange refinancing. Pre-exchange financing will be discussed first.

In a 1031 exchange, all the proceeds from the sale are supposed to be passed on 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. There may be times, however, when you would like to use some of that money for other purposes. A smart move? Probably not, according to IRS v. Garcia.

Garcia was a taxpayer who decided to refinance his property in anticipation of the 1031 exchange.Garcia tried to avoid taxes and ran afoul of the 1031 rationale and the IRS.In order for you to avoid the Garcia issue, you may decide to refinance the replacement property. It can be acceptable to pay taxes or cash out the equity otherwise known as ‘boot’. 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 a good way for you to take some of that equity out of the replacement property and buy more real estate. Not all taxpayers want to leave their equity in the replacement property - some want to take out that equity and buy more real estate. There is a question, however, on how long you have to wait before the refinancing after the 1031 Exchange is completed? Some say wait a nanosecond.

Some will tell you that the time required for the finance is but a nanosecond. The nanosecond refinance is waiting just long enough after the 1031 Exchange to show the IRS through the closing statement that you have reinvested 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. Then there is cash payment (after the tax exchange) from the lender to you. What we have is essentially a pool of money that you can access after the exchange.

There is debate on how long one must wait after the 1031 exchange to show the IRS, through the closing statement, that you have invested all of your equity into the replacement property. There are risks because there is no definitive IRS rule regarding how long you have to keep the equity in the replacement property. A more prudent approach would be to keep the money in the replacement property in order to avoid the Garcia trap. When this is the situation, keep the equity in the replacement property until the following tax year, or until two years have passed from the 1031 exchange to the ultimate refinance.

The markets are falling fast, and there’s a significant downturn in investment performance.  Most investors think that the tumbling market performance is caused directly by the recession; however, there’s more to poor long-term investment performance than the recession.  If you’re in the midst of retirement planning and are worried about your 401(k) retirement fund, then pay attention to this article, since it might mean the difference between a bare-bones retirement nest egg and your dream of a Florida retirement!

Many baby boomers are growing increasing nervous that overall long-term investment performance has been on the decline – but surprisingly, the fault doesn’t completely lie with the investment firms, investment advisors and other financial professionals who are helping you with your retirement planning.  The major contributing factor to poor long-term investment performance has much to do with many investors’ inabilities to stomach a wildly fluctuating market.  A recent study by Dalbar, Inc. found that a less-than-ideal holding period was responsible for the decline of investment performance, since many investors sought to sell their shares after only four to six years in the market, despite any long-term expectations or investment strategies. 

Another major contributing factor to the downturn in long-term investment performance lies in the inability of investors to guess prime investing opportunities and timelines; in other words, investors are more likely to invest when markets on the rise.  Due to this feeling of joie de vivre when the market boom is fruitful, many investors will move their money away from safe investments in the anticipation that they will still make money.  Therefore, savvy investors will invest even during the slowest periods of economic growth, and always be sure to make safe investments.  After all, just because the market might look like it could grow forever, doesn’t mean you should stop making smart investment strategies for your retirement savings!

If you’re headed towards retirement, keep strong during the tough times if you want to see a healthy long-term investment performance with your portfolio; your investment advisor will thank you for it!

For more information on smart retirement planning, visit www.kenhimmler.com, the IRA and 401(k) experts!

Authored by Kenneth Himmler, Sr.

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