1031 Home With Low Equity

3 Replies

Hey Team,

Tried doing some research on this and haven't quite come up with concrete answers.  Could you help me understand what happens with a 1031 if a seller has low/no equity in the home?  Here's an example:

  • Purchase - $100k
  • Mortgages:
  1. 1st - $100k
  2. 2nd - $100k
  3. Equity = $0
  • Sale Price - $200

How would the 1031 be assessed if the sellers are bringing cash to close?



@Andrew Luong

It's a bit of a conundrum. Little to no equity with a potential capital gain and depreciation recapture.

I have a similar situation with a condo I bought in 2006.

You can still do a low equity to zero equity 1031 to push forward the depreciation recapture and capital gain. You would either have to bring cash to the table for the next purchase or try to work out a deal like seller financing.

@Andrew Luong You're still going to have the reinvestment requirements of purchasing at least as much as your net sale (200K) and using all the net proceeds (0) in the next purchase.

The 1031 is agnostic to the debt.  And debt does not impact gain.  You've accessed the gain through the refinances.  So you're only option really is to 1031 because you'll either use  roughly $30K  to pay tax.  Or you can use the $30K  to purchase another $200K property to satisfy your exchange.

Hey @Dave Foster - Thanks for the detailed explanation! Ultimately did the purchase (though it was tricky since the replacement property was bought in a single-member LLC). Still have more funds to go reinvest!

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