1031 Exchange Proceeds with Existing Mortgage

[Mike Huang]

Hi everyone,

So I was wondering what you would do when you want to do a 1031 exchange but have a mortgage on your existing property.

Say you're selling a house worth 500k but there's still a remaining mortgage of 300k. 

When you sell it for the 1031 exchange, do you reinvest the 500k or the 200k net after mortgage? If the answer is the 500k, then how do you come up with the difference to reinvest?

[Bill Exeter]

There are two (2) requirements.

(1) You must acquire a replacement property that is equal or greater in value based upon your net sale price.  The net sale price is your $500K sale price less permissible selling expenses such as broker's commission, title insurance charges, escrow fees or closing attorney fees, recording fees, 1031 Exchange fees, etc.  This would likely be around $470K. 

(2) You must reinvest all of the cash proceeds (net proceeds) that come out of the sale of your relinquished property into the purchase of your replacement property. 

You can always trade down in value or withdraw some cash, but it will result in taxable boot and a tax liability.