Tax Deferred Exchange & Taxes
tax deferred exchange of our commercial property
Tax Deferred Exchange & Taxes
We are making a tax deferred exchange of our commercial property up into a large apartment property. The apartments have some deferred maintenance so we would like to take some cash – about $40,000 — out of the transaction for some upgrades. My accountant now tells me that any money taken out of the transaction will be taxable to me. Is this true?
Yes, the accountant is correct. If you take $40,000 cash out of the otherwise tax deferred exchange transaction under Internal Revenue Code 1031 you will owe capital gains tax on that $40,000.
But do not worry. There may be a way around it. It is always a tax-free event when you refinance a property you already own. You can receive tax-deferred cash either before or after the exchange transaction, but not as part of the exchange. Do not take the cash at the closing of the transaction.
For instance, you can refinance the commercial building before entering into the exchange transaction or you can refinance the apartment after you close the exchange.
Since it sounds as if you have already started the exchange, it might be best to take the money out of the apartment by refinance after the closing.
Take this idea to your accountant and see if he/she agrees.