Castle Commercial Mortgage: 1031 Exchange Loan

Recent tax court ruling liberalizes refinancing under Section 1031: Under section 1031, the general rule is that any cash received by the taxpayer, whether at the sale of the Relinquished Property, or at purchase of the Replacement Property, will be taxed as cash boot.

Taxpayers find this requirement of section 1031 to be particularly onerous. Taxpayers reason that after making substantial cash contributions to their investment property certainly they should at least be able to take their cash contributions back out on a tax deferred basis. Cash contributions include: down payment, monthly reduction of principal balance on mortgages, and capital improvements to the investment real property. Nevertheless, the Internal Revenue Service Regulations are clear: Exchange proceeds received by the taxpayer during an exchange will be taxed.

A recent Tax Court ruling creates a planning opportunity which allows a taxpayer to effectively remove cash from a Relinquished Property and still accomplish a fully tax deferred exchange. In Fredericks v. Commissioner, TC Memo 1994-27,the IRS argued that the taxpayer received taxable boot in the amount of the proceeds of a refinancing occurring one week after the taxpayer entered into an agreement to convey the relinquished property. The Tax Court disagreed, stating that the taxpayer did not receive the refinancing proceeds from the Qualified Intermediary as part of the exchange, but received them from a third party lender as a result of the refinancing. Furthermore, the taxpayer had reasons for the refinancing separate from the exchange. The taxpayer had been attempting to refinance the relinquished property for some time prior to the exchange, the due date on the taxpayer's loan was approaching and the taxpayer would need to refinance the loan if the exchange failed to close. So planning is essential. We provide cash out 2nd mortgage financing to you in advance of the sale of your 1031 relinquished property. This provides you with newly borrowed funds and reduces the amount which is escrowed as part of the 1031 exchange. It changes your cash position and frees up cash for other investment purposes. Sometimes it makes sense to reduce the amount of cash escrowed in your 1031 exchange to "match" the amount of down payment which you will need to buy your replacement property. This can increase the leverage on your replacement property. Please be aware that refinancing the relinquished property can increase the risk of tax recognition when a 1031 exchanges follows the refinance.

We make easy. No loan application, no credit report, no appraisal, no environmental, no survey, just simple one-time fee (1% origination fee--minimum $500) and you receive cash prior to the sale of your relinquished property.

1031 Exchange Loan Application



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