What if my replacement property costs less than my sold property?

Even investors who understand the basics of 1031 exchanges sometimes get caught out when it comes to finding replacement property that is equal or greater in value to the relinquished property. Perhaps the investor has located the right replacement property and it actually costs less than the investment/business property he or she sold. Must the investor keep looking until they find something else more expensive? Or must they forego a 1031 exchange altogether if they really want to buy that specific parcel of replacement property?

The answer to both questions is…no.

When faced with a situation where replacement property costs less than relinquished property, it is possible to do a construction/improvement exchange. This allows the investor to apply the excess funds towards improvements or new construction on the property they wish to purchase. Presuming all the funds from the sale of the relinquished property go towards the purchase and improvement/construction of the replacement property, all capital gains taxes should be deferred.

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.