1031 experts question if you please

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

scenario purchase price 950k 250k down 700k mortgage..

sell for 1.2

I 1031 into new building so I cover the 950k purchase what about the mortgage? Do I need to get a mortgage for 700k to match the original balance I will have paid this loan in full prior to this as my pre pay is up.. so there will be do debt at the time I sell and do the exchange.. does that change anything.

Thank you in advance.

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Vaibhav PuranikPro Member
Member since 2025 · 75 posts · 40 votes
1d
Short answer is - you need to reinvest $1.2M sale proceeds, not merely $950K of your original investment. If the loan is paid off earlier, then you don't need to worry about having a specific amount of mortgage. I also recommend you to talk to a CPA first. It's not a cliche, it's critical.
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Dominick AustriaBusiness Member
Accountant · Las Vegas · Member since 2019 · 51 posts · 21 votes
23h
1031 exchanges required the amount realized (Proceeds - selling expenses) to be reinvested. The amount realized is different from your deferred gain (Proceeds - expenses - adjusted basis).
In your scenario, the amount realized is $1.2M. The mortgage does not come into play at all. The deferred gain is $250,000. Anything less than $1.2M reinvested will be considered as boot which is taxed as capital gain.
The same would be true if you bought the replacement property at $1.2M and only put $500k down and took a mortgage for $700k. You would essentially receive boot of $700k because you only reinvested $500k of the amount realized.
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- Jay HinrichsBusiness Member
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  Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
  22h
  Ok so If I pay off the loan and own it free and clear so I am in it 950k in cash.. ( since I paid off the loan before selling it..
  so now i sold the property for 1.2 .. no debt.. now have 1.2 in 1031 exchange so I have to pay cash of 1.2 on the next property other wise I pay boot is that what your saying ?? once I pay cash for the new prop at 1.2 or more .. I suspect I am free to use it as collateral for a loan in the future as well if need be ? is that correct. ?
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
4h
Jay, close. Two tweaks.
You need to reinvest all the net cash the QI holds ($1.2M less selling costs) and buy property worth at least that much. It doesn't have to be all cash, though. If you want a $1.5M building, you can put in the full exchange proceeds and finance the rest. What you can't do is put in less of the exchange cash and cover the gap with a loan.
On the math, the gain isn't $250K. Your basis is the $950K plus improvements, minus the depreciation you've taken, so the gain is higher. Any boot is generally taxed first as depreciation recapture at up to 25%.
And yes, once you own the new property you can borrow against it, and cash-out refi proceeds aren't taxable. Keep the refi separate from the exchange rather than arranged at or right around closing, so it doesn't look like you pulled cash out of the exchange. Also, the interest deduction follows how you use the refi money, not the property securing it.
Feel free to DM me, I’d be happy to send over a few 1031 resources that may be helpful.
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