The "Greater or Equal Value" Rule for 1031 Exchanges

As if there weren’t enough rules to follow when completing a valid 1031 exchange (45 days to identify replacement property, 180 days to close, etc.), the IRS throws another wrench into the works. It has to do with the value of the replacement property.

In order for your exchange to be valid and completely avoid paying capital gains taxes on the sale of your relinquished property, the IRS requires the net market value (including equity) of your replacement property to be the same as, or greater than, the property you sold. Otherwise, you are not able to defer 100% of the capital gains taxes that would be due.

For example, let’s say you want to sell a current property that is worth $1 million with an outstanding mortgage of $750,000. To fully defer all capital gains taxes with a 1031 exchange, you will have to purchase a replacement property that has a total net worth of $1 million. In addition, you will need to have debt on the replacement property of at least $750,000. Of course, you can purchase multiple replacement properties (subject to another set of rules, of course), and as long as their cumulative value is $1 million and cumulative debt is $750,000, you can defer all capital gains taxes.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.