1031 Exchange Question

2 Replies

When using a 1031 Exchange, do you have to replace the actual amount of real estate value into another property or is it just the gain that you need to transfer to the new property?

Example: I bought a $200k SFH as a primary residence. After 6 months I used a HELOC to leverage the property to buy another rental property. After 1 year the home was turned into a rental property. The home was bought using a standard 30 year mortgage.

Home value: $300k

Mortgage balance at sale $120k. 

HELOC balance is $20k

Realtor Fee: $19,500

I walk away with $140,500. 

So do I need to roll the $140,500 into another SFH rental or do I need to roll the value of the original property $300k?

Thank you!

@Kirsten Braddock , It's actually both if you want to defer all tax.  You must purchase at least as much as you sell (the 300K less closing costs) and you must use all of your proceeds in the next purchase (the $140Kish).

You can purchase less than you sold or you can take cash out.  But when you do the IRS sees that as taking profit so you pay tax on that amount.  It does not affect the remainder of your exchange.

You can also use your proceeds to buy more than one property.  And you can allocate those proceeds in anyway you choose.  Purchase one property for cash and take out maximum leverage on the second - something like that.

Don’t forget. If you do pay taxes, it’s not on what you walk away with but on what you made. 

In he above example. $300k sale price minus $200k purchase price minus $20k commissions. You owe capital gains taxes on $80,000. (Usually 15%, so $12,000) plus 25% tax on the depreciation you’ve taken over the years. (it would be 25% on 3.6% of $200k about $1820 per year you depreciated it.). 

Ps. I’m not a lawyer, an accountant or a cpa. Your mileage may vary but doesn’t seem like enough gain to bother with a 1031 if you don’t have one in mind already. 

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