Must 1031 Like Kind Exchange = Sale Price or Greater to Qualify?

[Peter K.]

Using basic numbers, assuming I sell a property for $10M and after cost basis is accounted for and mortgage is paid off, I have a net taxable gain to me of $3M.

I'd like to purchase a rental lake house property for $1M (funds coming from that $3M taxable gain).  Is this possible to 1031 into?  I read a post on here that stated in order for it to qualify, the new purchase of the 1031 had to be of the total sale amount ($10M or greater).  I couldn't just use a portion of the taxable gain to purchase a less expensive property?

(The properties do qualify for like kind exchange.)

Thanks for any help/input!

[Dave Foster]

@Peter, @Bill B.laid out the gain calculations very well.  And you are correct, in order to defer all tax you must do two things - You must purchase at least as much as your net sale ($10 mil ish).  And you must use all of your net proceeds.

Here's the other shoe dropping however.  If you buy less than you sell.  Or if you take cash out.  The IRS says that you are taking profit out.  You want to say you're taking your original capital or basis out.  But the IRS says no it is profit.  So, like Bill said, if you purchase that much less than you sold you will pay tax on everything until you reach the limits of your gain.  So most likely a 1031 would not benefit you at all.