1031 exchange question

[Kyle J.]

A friend of mine is looking into doing a 1031 exchange on some property; however, he's getting some conflicting info on one aspect of it so I thought I'd ask the experts here.

Here's the situation:

He is selling some vacant land that he's owned for several years and is going to buy a rental property.

He originally bought the vacant land for roughly $80k and is selling it for $140k.

The rental property he is buying is $275k.

He would like to only do the 1031 exchange using the $60k profit (capital gain) on the vacant land he's selling, and keep the other $80k (original purchase price amount for the land) for other purchases (possibly not real estate related).

The 1031 tax company (intermediary) has told him that he must put the entire $140k (selling price of the land) towards the purchase of the new property. However, his tax preparer is saying that it would be okay for him to put just the $60k profit towards the new property.

Clearly, both of these can't be true.

My friend's argument is that he has already paid taxes on the original $80k he used to buy the land, so why can't he just roll over the $60k profit and avoid the captial gains tax on the whole amount.

I wasn't sure one way or the other, so I thought I'd ask the experts here to see if anyone knows.

[Joel Owens]

Don't use the "oh crap" method when doing 1031's. What do I mean by this is I get sellers asking me on deals to do the 1031 and hold funds etc. I tell them I can't do that. I have seen sellers try all kinds of crazy things in the past.

People do all kinds of things on bad or conflicting advice and then try to unring the bell later on when what they have done will not stand up to an IRS audit.