Help understanding the details of a 1031 exchange

1031 Exchanges
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Help understanding the details of a 1031 exchange

David Kim
Member since 2019 · 4 posts · 2 votes

I am confused regarding the "greater or equal" aspect of the 1031 exchange. If I own a commercial property worth 1 million free and clear, can I 1031 exchange it to another commercial property worth 1 million but finance 500 thousand so that I can pocket the other 500 thousand?

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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
6y
Originally posted by @Dana Richardson:

I would like to say that @dave Foster is wonderful!   He helped us with our 1031 exchange. I highly recommend using him to handle your 1031 exchange.

 +1 He is the best in the industry and I wouldn't hesitate to use him again. At first I thought it would be better if I went with a traditional, large company. But as I did more and more research, I realized that there is a much more effective solution to keeping your funds safe, which is what Mr. Foster's company provides. 

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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    6y

    You must invest greater or equal to the value you relinquished. If you exchange the entire million dollar proceeds into your up leg and then finance after the transaction you closed you should be within the rules.  If you invest $500k as a downpayment and pocket the $500k that is taxable.Always check with a CPA or speak with a 1031 specialist like Bill Exeter.

    1Reply
  • David Kim
    OP
    Member since 2019 · 4 posts · 2 votes
    6y

    Thanks for your reply @Ellis San Jose! I am new to real estate so can you help me understand your reply a bit better? Are you saying that I can exchange the entire million dollars into another property and then do a cash out refinance so that I can pocket 500K? 

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @David Kim,  You want to think of it as a two part rule.  You will defer all tax if you 

    1. purchase at least as much as your net sale (contract price minus closing costs and commissions)

    And

    2. You use all of the net proceeds (net sale price minus any mortgage)  in the purchase or purchases.

    In your case there is no debt so your net sale and net proceeds are the same amount.  As long as you purchase at least that much you will completely defer all tax on gain and depreciation recapture.

    You can purchase less than you sell but the IRS interprets the difference as taking out profit.  So some or all of that would be taxable.

    But you hit on the best answer.  Do a complete exchange sell your property for $1 mil and purchase $1 mil of replacement property.  Then do a cash out refinance.  The IRS will interpret a cash out right before a sale as a way of accessing profit.   But when you do it after an exchange you are no longer acccessing profit.  You are taking out debt secured by the equity in the property.  So the refi after the 1031 is not taxable.

    A very solid plan

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • David Kim
    OP
    Member since 2019 · 4 posts · 2 votes
    6y

    Thanks @Dave Foster!! I now understand the concept completely and can advise my parents accordingly! 

    1Reply
  • Dana Richardson
    Clearwater, FL · Member since 2014 · 28 posts · 12 votes
    6y

    I would like to say that Dave Foster is wonderful!   He helped us with our 1031 exchange. I highly recommend using him to handle your 1031 exchange.

    1Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    6y
    Originally posted by @Dana Richardson:

    I would like to say that @dave Foster is wonderful!   He helped us with our 1031 exchange. I highly recommend using him to handle your 1031 exchange.

     +1 He is the best in the industry and I wouldn't hesitate to use him again. At first I thought it would be better if I went with a traditional, large company. But as I did more and more research, I realized that there is a much more effective solution to keeping your funds safe, which is what Mr. Foster's company provides. 

    2Reply
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