1031 Exchange Requirement

[Johnny Situ]

Hi BP folks,

I have a question for 1031 exchange, here's a scenario:

Relinquished property sales price: $180,000, remaining loan balance $102,000.

Replacement properties (3 properties):

Property A: $80,000

Property B: $85,000

Property C: $138,500

Each of the above replacement properties has 20% down mortgage.

Although I have met the requirements of the total purchase price has to be equal to or greater than the selling price, these are my questions:

1. Do I need to keep the same level of total equity in the replacement properties as it was in the relinquished property ($180,000 - $102,000 = $78,000)

2. How much do I require to spend on the replacement property from the total sales proceeds, considering it would be around $60,000 after agent commission and closing costs?

[Wayne Brooks]

Two rules:

1) replacement properties must cost as much as relinquished properties, which you meet

2) ALL of your cash proceeds from the sale must be reinvested to avoid any tax....you can add some cash to the deal but you can’t keep any of it. 

[Johnny Situ]

Thanks @Wayne Brooks for answering, so say at the end of the day I still have $5K left and can't use it all up. Do I just need to pay taxes on the $5K or I have to pay taxes on the whole profit gain? Does it also trigger depreciation recapture?

[Wayne Brooks]

You only have to pay taxes on the $5k “boot” I believe, and I think it applies to the recapture first. 

Others will know for sure. Your QI should certainly know. 

[Dave Foster]

@Johnny Situ, @Wayne Brooks nailed it.  You would need to purchase at least $180K and use all $60 if you want to defer all tax.  Otherwise you pay tax on the difference but do not jeopardize the rest of your exchange.  You do not have to allocate the proceeds equally.  and you do not have to take out the same amount of debt.  You can add cash from your own reserves.  But if you take cash or if you purchase less than what you sold you will pay some tax.

There's no firm convention on when depreciation recapture happens.  Ive seen accountants take that as the boot first.  More commonly the first boot is the profit and depreciation recapture stays in the exchange until last.  So in your example you would only pay tax on the $5K and all remaining profit and depreciation recapture would stay in the exchange.

[Steve P.]

@Johnny Situ  When you list A,B, and C properties, are you purchasing all three, by spreading out the $60K as downpayments for each? Is this possible in a 1031?

Someone recently mentioned to me that there is a 30% down payment requirement for the home you are exchanging for when it comes to a1031 Exchanges. Is this accurate? 

[Johnny Situ]

@Steve P. yes the sales proceed has to be spreaded out to 3 properties as DP. As far as 30% goes, I don't think there is strict requirements for that, it all depends on your lender, for me it varies from 15% to 25% from lender to lender.