Partial 1031 - New York City

4 Replies

Hello,

I am planning to selling my investment property in NYC 

cost $721,000

est. selling price $1,000,000

mortgage left $350,000

accumulated depreciation $100,000

And buy an investment property with a value

$400,000

The remaining money I have I want to help to buy a primary residence which as my parents are getting older and I have decided to get a duplex (two-unit) house to have my parents live in the unit.

I have heard that it is better to do a 1031 with same or larger value and then to do a cash out refi ....

It would be great if you could help me figure out how much my tax liability roughly would be if I do this partial 1031 with much lower value. 


Thank you in advance!

I think you should speak to your tax accountant.

@Krystal Ahn , Your adjusted basis is around $600K.  If your net sale is for $1,000,000 then you will have a gain $400K including capital gain and depreciation recapture.  

The rules of 1031 are that if you want to avoid all tax you must purchase at least as much as you sell.  You can purchase less but the IRS will look at each dollar less as first being a taking of profit.

So if you sell for $1 mil and only purchase for $400K you would be buying down $600K.  The first $400K of that would be considered to be taking gain and would be taxable.  Since your entire gain was $400K there would be no need to do the 1031.

So if you want to defer taxes then you will need to buy some other properties.  A residence for your parents is a kind thing to do but unless you treat it like a rental it will not count for 1031 treatment since you are selling investment property and buying investment property.  However there is a way to treat it like investment and have it still be a free place for your parents to live.

Regarding refi vs purchasing multiple properties in a 1031 that's going to depend on your desired timing and size of purchases.  In your example for instance it doesn't work because you need both purchases (and probably one more) in the 1031so you can meet the reinvestment requirements.  A refi after a 1031 is a more conservative approach.  Typically a refi will give you access to less cash equity and may be more expensive.  That's a good question for your mortgage lender.  

But if you want to shelter that $100 - $150K in tax you'll need to go the diversification route and simply purchase more properties in your 1031.  There are several ways to make this a more streamlined and easy approach with less risk.  You'll be fine.

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