I am not finding a definitive answer on this. Lets say that I am looking into possibly selling a property and should have a profit of around $50,000.00(that's pretty exciting!). I have the chance to purchase a property that will require around a $40,000 down payment. My question is, can i used $40k of the 1031 for the down payment, and then use $10k to help fund the escrow account? Or will all $50k have to be used towards the down payment?
My understanding is that if you use all the proceeds from the sale for the new property (purchase price plus purchasing expenses), it is tax deferred. If those funds get used up during the escrow process, I think that should be a valid expense. If you're getting a refund of some of those funds, that portion would be taxable.
Keep in mind that the full proceeds of your sale should be invested in the property(ies) you 1031 exchange into. You cannot sell a house for $150k with a cost basis of $100k, take $100k out into your personal funds and invest the remaining $50k in the new property and have it shielded.
I am not an expert in these matters, so don't take this as the final word.
And to be clear, you must use All of your cash received from the sale, not just the profit, along with buying a property of equal or greater value than what you sold, to defer all taxes.
@DJ Cummins , if you're talking about taxes and insurance escrows then no you cannot use 1031 proceeds for that. You must use your 1031 proceeds for the purchase of actual real estate. Not all closing costs qualify - like prorations, escrows, and loan origination.
1. Purchase at least as much as your net sale (contract price minus closing costs and commissions) and
2. Use all of the net proceeds (the net sales price minus mortgage pay off)