What Happens When You Go Down In Value In A 1031 Exchange?

Some investors new to the benefits of section #1031 often believe that “like-kind” means that both the relinquished and replacement properties must be identical in every way. This is, of course, not true. The “like-kind” requirement, in a nutshell, simply means that both properties must be similar in nature or use. There is no requirement that both properties share identical values.

In fact, many 1031 exchanges are conducted where there is a significant difference in the price of the two properties. The only caveat to be aware of is that if the value of your replacement property is lower than the value of your relinquished property, the difference will be considered “boot” and you will face capital gains tax on that difference.

Of course, if you purchase replacement property with a higher value, then you don’t face this particular “boot” issue.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.