Refinancing and Cash Out Prior to 1031 – is it Boot?

Posted October 3, 2011

Good question Steve. Under IRS Section 1031, cash or other non-like kind property actually or constructively received by the taxpayer in a tax deferred exchange (commonly referred to as “boot”) causes the taxpayer to recognize gain to the extent of such boot. Loan proceeds received by the taxpayer generally aren’t considered boot unless its determined that the primary purpose of a cash out refinancing is to avoid recognition of the gain.

The tax result is the only significant difference between taking boot out of the sale and borrowing on the property before the exchange. The IRS however, has instituted the “step transaction doctrine” to combine the proceeds of the pre exchange refinancing with the exchange if the steps in the transaction are interrelated. The issue being if the steps should be viewed as separate steps for tax purposes or they should be rolled together into an integrated transaction for taxes purposes.

If this sounds like the fast track to tax court with your tax attorney, it is. So with that in mind, I’ll turn the podium over to 1031 Expert, Steve Rosansky for more.

Refi prior to 1031 – is it boot?

1031 Exchange, Commercial Real Estate

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