Taxes after 1031 exchange performed

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Taxes after 1031 exchange performed

Mary Jay
Glendale, AZ · Member since 2017 · 1k+ posts · 236 votes
Hi guys,
Will you pls help me figure out how to calculate taxes?
Lets say I purchased a (house 1) for 200K and sold it for 700K so the profit is 500K. However, since I  did a 1031 exchange and purchased a 300K property (house 2) and a 200K property (house 3) to make sure I dont pay taxes..
Now, few years later, lets say I want to sell that 300K house that was purchased as a 1031 exchange, house 2.... Lets say I sell it for 400K... and make 100K profit.
What taxes will I be responsible for?
The taxes from the sale of the original house (house 1)
or the taxes from the sale of the post 1031 exchange house (house2)?
Thank you!
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Mark S.
Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
9mo

@Mary Jay if you replaced a $700,000 property with two properties totaling only $500,000, you owed taxes on a $200,000 gain, assuming you had at least $200,000 of capital gains on the sold property. Replacement properties cover your cost basis first, capital gains second and the total of replacement  property needs to at least equal the price of what you sold or the excess is taxable boot 

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  • G. Brian DavisPro Member
    Investor · Hatboro, PA · Member since 2016 · 2k+ posts · 845 votes
    10mo

    Hi @Mary Jay, You’ll only owe taxes on the gain from the property you’re selling now (house 2), not the original house 1. The 1031 exchange deferred the taxes from house 1, and those taxes carry over into the basis of house 2.

    In your example, your basis in house 2 is $300K (what you paid), so if you sell it for $400K, your taxable gain is $100K. You don’t pay taxes on house 1 again, its gain was already rolled into the basis of house 2. You’ll need to report the gain on house 2 when you sell, and the usual capital gains rules apply.

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  • Mark S.
    Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
    9mo

    @Mary Jay if you replaced a $700,000 property with two properties totaling only $500,000, you owed taxes on a $200,000 gain, assuming you had at least $200,000 of capital gains on the sold property. Replacement properties cover your cost basis first, capital gains second and the total of replacement  property needs to at least equal the price of what you sold or the excess is taxable boot 

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    9mo

    1) As Mark said, I hope this is a theoretical. Your original 1031 did not defer all your taxes. When you sell $700k property you have to buy $700k worth of property to defer all taxes not just the amount you have in profit.  

    2) When you did the exchange your “tax basis” for the two properties you bought would be reduced by your profit.  So if you truly had $500k in profit and deferred it all, your taxable basis would be zero. That means you would owe taxes on every dollar you netted after selling costs above $0. Plus all your depreciation recapture. 

    3) In reality.. in your example you would have been taxed on $200k in profit when you did your “partial” exchange. That means your taxable cost on your two properties would be $300k less than you paid. You or your CPA could allocate that $300k anyway you want. If you did $150/$150k then you’d have a basis of $50k on the $200k home and $150k on the $300k home. So if you sold #3, you would owe taxes on $150k from sale #1 (wrapped in to #3) and $100k from sale #3 PLUS the depreciation recapture on sale #1 and #3. 

    Ps. This is all “my understanding” of it from the one I did.  Your CPA should answer this as you shouldn’t be doing this yourself.  If you get lucky @Dave Foster will chime in saying you owe a lot less, but I don't think so.  

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    9mo
    You’ll want to speak to a cpa on this but if you received any money at closing on the 1031 properties, that’d be considered boot. When you do a 1031 exchange, the basis in your new property is effectively deferred. So if you had a $200k gain and bought a $300k house, your basis in that new property is $100k and that’s what your new depreciation is based off. Let’s say you sell the new house (with $100k of basis) for $500k, you would have a $400k gain.
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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9mo
    Quote from @Account Closed:
    When you did the 1031, the $500K gain from House 1 didn’t disappear — it got carried over into your replacement properties If you sell House 2 later without doing another 1031, you trigger: • the deferred $500K from House 1 plus • the new $100K gain on House 2 Total taxable gain = $600K

    The full $500,000 wasn't deferred from the 1031 Exchange.
    She sold $700,000 worth of property and only replaced it with $500,000($200,000 + $300,000).

    She should have a conversation with her accountant because it depends on multiple factors such as how much depreciation was taken on the property, how much basis was allocated as part of the replacement properites, etc.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9mo

    @Mary Jay, To defer all of the tax, you must purchase at least as much as your net sale (sales price minus closing costs and commissions) and use all of the proceeds (Any equity received) in your 1031 exchange, as @Bill B. and others had mentioned.

    If your sale is 700k after commissions and you receive 150k in proceeds after the mortgage is paid down, then you must purchase at least 700k in investment real estate and use all 150k of the proceeds in your exchange, which, as you mentioned, can be broken up into multiple investment properties.

    Since your example only shows you purchasing $500K of real estate, that throws the numbers off from the get-go. In theory, you did not fully defer the tax. And only your accountant can help you piece together how much tax you deferred in the first 1031.

    But the short answer to your question is that you would pay both the deferred tax from the first 1031 as well as the new profit and depreciation from the replacement property.

    Unless you continue to 1031 exchange and defer the tax, you're responsible for all of the prior deferred tax that you used to purchase your replacement property, in addition to the profits from the sale of the current investment property.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    9mo

    Mary, the answer you got above is close, but here’s the cleaner tax explanation.

    With a 1031, the IRS doesn’t erase the gain from House 1. They transfer it into your new properties by lowering your basis. That means your basis in House 2 isn’t really the $300K you paid, it’s reduced by the deferred gain you carried over.

    So when you sell House 2, you’re actually triggering:

    • The deferred gain from House 1 that was built into House 2
    • Plus the new gain from House 2 itself (the $100K)

    This is why people say “1031 doesn’t eliminate taxes, it just pushes them into the next deal.”

    If you want to avoid paying tax again, you’d need to 1031 House 2 into another property. Otherwise, the deferred gain becomes taxable the moment you sell.

    Hope this helps make the flow of gains a bit clearer.

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  • Rohullah Sharifi
    Dr · VA · Member since 2025 · 154 posts · 34 votes
    9mo

    When you sell House 2 (the $300K replacement property), you will owe tax on both:

    1. The original deferred gain from House 1

    (Your $500,000 profit that was deferred through the 1031 exchange)

    2. The new gain from House 2

    (Your $100,000 increase from $300K → $400K)

    A 1031 exchange defers taxes, it does not eliminate them.
    So when you later sell a replacement property without doing another 1031 exchange, all deferred gains become taxable.

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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
    9mo

    You should check with a CPA on your specific situation, but generally, if you receive cash at the closing of a 1031 exchange, that portion is considered taxable “boot.” In a 1031 exchange, the tax basis from your old property carries over into the replacement property — it doesn’t reset.

    So, for example, if you sold a property and had a $200K gain, then used the proceeds to buy a $300K property, your basis in the new property would be $100K. That $100K is what determines your depreciation going forward. If later you sell the new property for $500K, you’d recognize a $400K gain at that time.

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