Capital Gain and 1031 exchange

[Darius Moezinia]

do you have capital gain tax liability if the purchase price of the new investment property is less than the net proceeds of the one you are selling in a 1031 exchange? (Net proceed, includes Escrow fees, Title, 6% sales commission, credit to buyer, transfer tax and all the usual fees for recording and ..... which you do not have control over. In this case it was a cash purchase and no financing involved)

[Dave Foster]

@Darius Moezinia, wait a minute.  I may be mis-understanding cause @Wayne Brooks is hardly ever wrong.  But in this case I think you absolutely would have a tax liability.  The two part reinvestment rule of sec 1031 is that in order to completely avoid all tax  you must purchase at least as much as your net sale (contract price minus closing costs and commissions) and you must use all of the proceeds (cash left over after mortgage is paid out of the net sale) in your replacement property.

So if the purchase price of the new property in a 1031 is less than the net sales price of your old property you will recognize a taxable gain on the difference..  Any cash taken out or any amount purchased less than what you sold is treated as taking profit until you have reached the full amount of your profit.