Partial 1031 exchange question

[Leonid Sapronov]

Hi everyone,

I could probably figure this out eventually, but I'd like to get an authoritative answer. There's probably someone on here who can answer this in 2 seconds.

Let's say I bought a rental property for $400k and sold it for $500k. At time of sale, the mortgage balance was $300k. I take the net proceeds - $200k - and buy another rental straight up, no mortgage. My understanding is that this would be considered a partial 1031 exchange. What part of this would I have to pay taxes on and how much? Ballpark.

Thank you!

[Dave Foster]

@Leonid Sapronov, It'll take a little more than 2 seconds but not much:)  There's a two part requirement to defer all taxes.

1. You must purchase at least as much as your net sale.

2. You must use all of your cash proceeds in the next purchase.

So in your case that means that to defer all tax you must purchase at least $500Kish of real estate using all $200K of net proceeds.

You can purchase less than you sell (like your stated intention above), and you can take cash out.  But when you do the IRS looks at the difference in reinvestment or the cash you take out as profit first.

So if you purchase $500K - no tax

If you purchase $450K - pay tax on the $50K difference (and shelter the remaining $50K of profit

If you purchase for $400K - pay tax on the $100K difference or essentially all of your profit so no tax savings. no need to do the 1031.

The IRS doesn't let you take money unless you pay tax on it.  So just reinvesting your equity is a non-starter.