1031 Tax Exchange--What Exactly comprises the Net Sales Price?

2 Replies

I'm selling a rental property for $232,000. There is a $60,000 loan balance owed on it. After commission and closing costs and paying off the first, I will net $158,000. 

1. Can someone clarify for me which of the above values ($232,000 or $158,000) is the Net Sales Price?

2. If I purchase another rental  that is less than the Net Sales Price, will that totally nullify the 1031 tax exchange or would I just have to pay capital gains taxes and some depreciation recapture on the difference (the boot) between the Net Sales Price and the lower price I pay for my next rental? 

Thank you

@Richard Aaron , It's neither.  The net sales price is net of closing costs but before debt relief.  so in your example the net sales price is $232,000 - $14000 (closing costs I backed into) = $218,000.

Your net cash is the other important component in a 1031 and that would be the net sale ($218,000) - $60,000 (debt relief) = $158,000.

You have two requirements in a 1031 if you want to avoid all taxes.  First you must purchase at least as much real estate as your net sale ($218,000).  Second you must use all of the proceeds in the purchase of the replacement property or properties.

You can purchase less than what you sell and you can take cash out of the closing if you want.  You pay tax on the difference but the rest of your 1031 stays intact.

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