1031 Exchange - Existing Loan and Depreciation Recapture

9 Replies

Hi all,

I am considering doing a 1031 Exchange of my Duplex Rental Property which has been straight line depreciated for 25 years. with an existing loan of about $250K.

1. If I understand correctly, the depreciation capture ( estimated $250K)  is not triggered by a properly executed 1031 exchange and is deferred. Thus avoiding/deferring  capital gain taxes and depr. recapture.

2.  How is the $250K Loan proceeds handled in the target replacement property.

For simplicity, assume the Duplex sells for $1Million and I buy a replacement property for

$1.1Million. Does this mean I need put on financing on  the replacement property of $250K + 100K = $350K or I could add 100K cash and then finance $250K ?

Please explain how the financing would work in the replacement property ( hopefully I don't have to make up the loan difference with cash ).

Apologies if this has already been answered.

Thanks to all the BP Experts, Rich :)

Hi all, 

Some research below shows that the existing mortgage paid off by the buyer would be considered as  BOOT  income to the seller ( me ) and subject to tax.

So, that means that I would be paying capital gain taxes on $250K  ( 5.7%)  right in the 1031 Exchange ?

Or, if I pay off the $250K mortgage first with my own cash then I can avoid this.

Hmmmm, confusing ... 

http://www.realtyexchangers.com/1031_Exchange_FAQ/...

I want to 1031 Exchange into a property that has a mortgage. How does that work?

In a 1031 exchange, the assumption of a liability by the other party (or transfer of your property subject to a liability) is treated as boot received by you. It's called mortgage relief. To figure out your net mortgage relief, you may offset against it your assumption of a liability (or transfer of property subject to a liability).
The assumption of a liability or the transfer of a property subject to a liability is treated as boot.

hi Richard- put simply- you need to buy as much property as you sold in an even exchange.  If your relinquished property has a loan, then your replacement property must also have a loan, or you need to bring the loan amount to the transaction in cash- which practically no one ever does.

As Leslie said, you basically only have two requirements for the 1031, money wise.

1) The replacement property price must be equal to or greater than the net sale price proceeds from the relinquished property.  $1M sale, less say $60k closing costs/fees/commissions means $940k replacement property.

2) All the cash received from the first property must be reinvested. $940k-$250k mtg=$690k cash Mnimum must be reinvested.

That's it.  You can bring additional cash to buy a more expensive property, get a larger mortgage, whatever.  But as long as you meet the two requirements above, you're good, as far as price/cash goes.  Of course you have to meet the other requirements, timelines for identifying/completing the replacement property purchase, proper procedures with a QI, etc.

Your conclusion about the mortgage above is incorrect.  That deals with selling, sub2, and Not that assumed mortgage in your replacement calculation. If you paid your mortgage off prior to the sale, that would increase your "cash received from the sale", that would have to go into the new property.

Find a localQI now, and they can guide you. Their entire fee is less than $1000 for the whole transaction.

Originally posted by @Leslie Pappas :

hi Richard- put simply- you need to buy as much property as you sold in an even exchange.  If your relinquished property has a loan, then your replacement property must also have a loan, or you need to bring the loan amount to the transaction in cash- which practically no one ever does.

I exclusively help people with replacement property in exchanges.  They have loans in place and are readily available.  Please let me know if you would like to chat.  Good luck.

 Hi Leslie,

So, if the replacement property has a loan of 200K and my relinquished property has a loan of $250K, a 50K difference, then how does it work out to create an additional 50K loan ?

I don't understand, how this works. It seems that the ( existing bank ) loans are NOT being paid off in both properties ? 

Thanks for your help, Rich

Originally posted by @Wayne Brooks :

As Leslie said, you basically only have two requirements for the 1031, money wise.

1) The replacement property price must be equal to or greater than the net sale price proceeds from the relinquished property.  $1M sale, less say $60k closing costs/fees/commissions means $940k replacement property.

2) All the cash received from the first property must be reinvested. $940k-$250k mtg=$690k cash Mnimum must be reinvested.

That's it.  You can bring additional cash to buy a more expensive property, get a larger mortgage, whatever.  But as long as you meet the two requirements above, you're good, as far as price/cash goes.  Of course you have to meet the other requirements, timelines for identifying/completing the replacement property purchase, proper procedures with a QI, etc.

Your conclusion about the mortgage above is incorrect.  That deals with selling, sub2, and Not that assumed mortgage in your replacement calculation. If you paid your mortgage off prior to the sale, that would increase your "cash received from the sale", that would have to go into the new property.

Find a localQI now, and they can guide you. Their entire fee is less than $1000 for the whole transaction.

 Hi Wayne,

I believe I understand the 2 points above. 

So, the replacement property purchase must  involve 3rd party ( bank ) financing ( >= $250K ) to match the relinquished property loan ( $250K) so that no BOOT is incurred ?

The point being that there must be $250K loan to match.

Thanks for you patience and help, Rich

Yes, or bring that much additional cash to close.

well put!  You must take as much loan on the new property as you had on the old problem early or make up the difference in cash.  iWork in syndicated real estate where the loans are already in place- no qualification required.

Originally posted by @Leslie Pappas :

well put!  You must take as much loan on the new property as you had on the old problem early or make up the difference in cash.  iWork in syndicated real estate where the loans are already in place- no qualification required.

 @Leslie Pappas,

Ok, this means that there is a existing marketplace of "Loans" ( like Trust Deeds ) where an Investor would loan money to the buyer in a 1031 Exchange ?

Not sure what "no qualification required" means ?   

Typically, what kind of loan periods and interest rates are being used ?

Interest only, amortized loans 3 5 7 10 years etc.

Will this be a better way to finance than "bank" financing ?

Thanks for your patience and help, Rich

hey Rich- I'm afraid I may have confused you.  I work in the field of syndicated real estate.  That's what it is that I'm referring to.  There is too much to explain here online.  If you would like to learn more, please give me a call tomorrow.  Many thanks- Leslie

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