1031- Defining proceeds from relinquished property

6 Replies

Two rules as I understand it are in order to defer all taxes in a 1031, newly purchased property must be equal or greater in value of the net sales price of relinquished property and carry the same leverage (loan) of the relinquished property.  

Do all proceeds have to move to new property regardless of actual capital gain?  For example we have done capital improvement to the property, can we get that $ back in the exchange?

Yes, all cash proceeds must go into the new property.  The rule is actually that 1) the sales price of the new property must be equal or greater to the sales price, net costs, and 2) all Cash must be reinvested.  This usually results in the same or greater loan amount, but not always....you could bring in additional cash.

Thanks Wayne, so if you did not put 90% of net proceeds into the new property, they consider that 10% a gain and it becomes taxable ?

that is my understanding.  Any cash you do not carry forward is taxable.

@Dave Limbocker , That's correct.  However you don't exactly have to replace the debt.  You can replace debt with your own cash as long as you don't decrease debt by purchasing less than what you sold.

So the two criteria are Purchase at least as much as your net sale and use all of the proceeds in the next purchase or purchases if you want to defer all tax.

It makes perfect sense that capital improvements or original down payments would be able to be pulled out - after all they will never be taxed.  But what you call a return of original capital or return of capital improvements the IRS calls profit.  And they've got nuclear weapons.

OK gotcha, One of my partners had said that was a part of the 1031 rules but being an inquisitive lad I had to confirm.

Thanks to the respondents!

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