Selling and Buying property

[NA Wilkerson]

I’m looking to close on a 2.7M commercial building in next 6 months. The outstanding balance is 1.5M, I’d like to buy a 2.2 M 24 unit condo complex with profits with a 1031 exchange.

1. What do I do about the 500k difference between sale of commercial and new purchase. It would be exposed to capital gains?

2. Also, how/who do I finance the equity difference from 2.7M and after I payoff loan, I’ll only have 1.2M cash to use in the 1031 exchange on a 2.2M plus new investment?

Who would I engage (like a commercial real estate agent, CPA, both) to help with this type of transaction?

[Dave Foster]

@NA Wilkerson, There's actually several players you want on your team.  You may already have your realtor needs covered if you've got a contract for sale and know the property you want to replace it with.  A CPA will be your go to for tax filing and mitigation.  Financing would be through a commercial lender.  And the QI (qualified Intermediary) is the extra component whose sole job is to facilitate the 1031 exchange for you.

In order to completely defer all tax in a 1031 exchange you must purchase at least as much as you sell and you must use all of the proceeds in the next purchase or purchases.  So if your net sale is 2.7 with an outstanding loan of 1.5 then you would need to purchase at least 2.7 mil in real estate using 1.2 mil in cash (plus other cash or financing).

You can purchase less than you sell and you can take cash out.  But if you do the IRS sees that as a taking of profit and you pay tax on the difference without jeopardizing the rest of the 1031 exchange.  So you're absolutely right.  If you sold for 2.7 and bought for 2.2 you would pay tax on the $500K but would shelter whatever gain was left.

Another option would be to purchase a second property to get above that 2.7 total.  

You've got the start of a pretty good scenario.  Just need to mind the Ps and Qs of the 1031 process.  Right now is a good time to start working with a lender and getting a good understanding of the 1031 process.  And you'll knock this one out of the park.