How Overfunding Your 1031 Exchange Loan Can Backfire

When it comes to executing a 100% successful 1031 exchange, the IRS has strict rules for determining compliance. Failing to meet even one of the requirement can subject you to partial or full capital gains tax liability.

To fully defer all capital gains taxes, you must:

(1) buy replacement property that is equal or greater in value than your relinquished property,

(2) use all the cash proceeds from the sale of your relinquished property toward the purchase of your replacement property, and

(3) replace the value of your debt on the relinquished property.

One place where investors stumble is taking on new debt. If the debt on your replacement property exceeds the amount of debt you had on your relinquished property, the difference may be considered “boot” and become taxable to you.

To avoid this scenario, be sure to avoid overfunding the loan on your replacement property.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.