1031 Replacment Property: Help Me Understand My Options

2 Replies

Hi BP Experts!

I recently sold a home in California for $855k, rolling $236k into a 1031 Exchange. I bought a prelacement SFR for $555K, with ~$140k. This leaves me with ~$94k in the account and the need to purchase a property that is worth roughly $300k.

I just found a great property in foreclosure for ~$250k. It needs a complete kitchen reno, both bathrooms replaced, a one new wall, and new flooring throughout. My questions: 

-Do I have to find a 100% match on 1031 or only 95%? Because I'd be in a good position if it's only 95%

-Is the remaining value determined on the purchase price or the appraisal price (It will likely appraise closer to $300k)?

-Do I have any option where I could pay a higher selling price and get a credit directly paid to a contractor for some of the construction? (i.e. there's some damage that will be called out by the inspector)

Thank you for your help!


New-er Investor

San Diego/Chicago

Hi @Noah Lomax

You have to trade equal or up in value based on the net sale price (not gross sale price), so somewhere around $810K (ish).  You can trade down in value but you will pay tax on the amount that you trade down by.  It will not hurt your 1031 Exchange; you will just pay some tax. 

The replacement property value is based on the purchase price.  The appraised value does not come into play here.  

Increasing the purchase price of the replacement property and then having an amount paid to a contractor will not work because it is not considered to be real estate at the date that you closed on the purchase.  The amount paid to the contractor is services to be performed in the future, and will result in a reduction of the purchase price for tax purposes. 

Hi Bill,Thank you so much! 

My 1031 Exchange is actually through Exeter! I've followed your posts on here quite a bit, so I'm very grateful for your reply.

It sounds like I would actually be close to or at the net value then. I will search back through my documents for that price. 

Would it be adviseable to intentionally put less than 20% down and use a cash boot to help fund the reonvation? For example, putting only 20% down would leave me ~$40k in unutilized cash. If I took that portion as a cash boot to help fund the renovation (~$40k) would I pay taxes on the full amount or just on the $40k?