1031 experts question if you please

1031 Exchanges
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1031 experts question if you please

Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

scenario purchase price 950k 250k down 700k mortgage..

sell for 1.2

I 1031 into new building so I cover the 950k purchase what about the mortgage? Do I need to get a mortgage for 700k to match the original balance I will have paid this loan in full prior to this as my pre pay is up.. so there will be do debt at the time I sell and do the exchange.. does that change anything.

Thank you in advance.

@davefoster

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1w

Jay, close. Two tweaks.

You need to reinvest all the net cash the QI holds ($1.2M less selling costs) and buy property worth at least that much. It doesn't have to be all cash, though. If you want a $1.5M building, you can put in the full exchange proceeds and finance the rest. What you can't do is put in less of the exchange cash and cover the gap with a loan.

On the math, the gain isn't $250K. Your basis is the $950K plus improvements, minus the depreciation you've taken, so the gain is higher. Any boot is generally taxed first as depreciation recapture at up to 25%.

And yes, once you own the new property you can borrow against it, and cash-out refi proceeds aren't taxable. Keep the refi separate from the exchange rather than arranged at or right around closing, so it doesn't look like you pulled cash out of the exchange. Also, the interest deduction follows how you use the refi money, not the property securing it.

Feel free to DM me, I’d be happy to send over a few 1031 resources that may be helpful.

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  • Vaibhav PuranikPro Member
    Member since 2025 · 86 posts · 48 votes
    1w

    Short answer is - you need to reinvest $1.2M sale proceeds, not merely $950K of your original investment. If the loan is paid off earlier, then you don't need to worry about having a specific amount of mortgage. I also recommend you to talk to a CPA first. It's not a cliche, it's critical. 

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  • Dominick AustriaBusiness Member
    Accountant · Las Vegas · Member since 2019 · 51 posts · 21 votes
    1w

    1031 exchanges required the amount realized (Proceeds - selling expenses) to be reinvested. The amount realized is different from your deferred gain (Proceeds - expenses - adjusted basis).

    In your scenario, the amount realized is $1.2M. The mortgage does not come into play at all. The deferred gain is $250,000. Anything less than $1.2M reinvested will be considered as boot which is taxed as capital gain.

    The same would be true if you bought the replacement property at $1.2M and only put $500k down and took a mortgage for $700k. You would essentially receive boot of $700k because you only reinvested $500k of the amount realized.

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    • Jay HinrichsBusiness Member
      OP
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      1w

      Ok so If I pay off the loan and own it free and clear so I am in it 950k in cash.. ( since I paid off the loan before selling it..

      so now i sold the property for 1.2 .. no debt.. now have 1.2 in 1031 exchange so I have to pay cash of 1.2 on the next property other wise I pay boot is that what your saying ?? once I pay cash for the new prop at 1.2 or more .. I suspect I am free to use it as collateral for a loan in the future as well if need be ? is that correct. ?

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1w

    Jay, close. Two tweaks.

    You need to reinvest all the net cash the QI holds ($1.2M less selling costs) and buy property worth at least that much. It doesn't have to be all cash, though. If you want a $1.5M building, you can put in the full exchange proceeds and finance the rest. What you can't do is put in less of the exchange cash and cover the gap with a loan.

    On the math, the gain isn't $250K. Your basis is the $950K plus improvements, minus the depreciation you've taken, so the gain is higher. Any boot is generally taxed first as depreciation recapture at up to 25%.

    And yes, once you own the new property you can borrow against it, and cash-out refi proceeds aren't taxable. Keep the refi separate from the exchange rather than arranged at or right around closing, so it doesn't look like you pulled cash out of the exchange. Also, the interest deduction follows how you use the refi money, not the property securing it.

    Feel free to DM me, I’d be happy to send over a few 1031 resources that may be helpful.

    [email protected]941-914-7779
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  • Sabbir Ahamed
    Md · New Mexico, USA · Member since 2026 · 2 posts · 0 votes
    6d

    Agree with the replies on the main point: reinvest the full net proceeds and buy at least that much property. Since the loan is paid off before the sale, there’s no debt relief to replace it.

    One nuance on “the deferred gain is $250K”: that’s only true if no depreciation was taken. The gain is the sale price minus your adjusted basis, and adjusted basis = $950K + improvements − depreciation taken. If you’ve owned it a while, the deferred gain is likely well over $250K.

    That matters if you end up with any boot (cash out or buying down in value). Boot is taxed first as unrecaptured §1250 gain at up to 25%, before the regular capital gains rates. So pin down your accumulated depreciation with your CPA before deciding whether to take any cash out.

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  • Diana KhanPro Member
    Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 540 posts · 188 votes
    15h
    Quote from @Jay Hinrichs:

    scenario purchase price 950k 250k down 700k mortgage..

    sell for 1.2

    I 1031 into new building so I cover the 950k purchase what about the mortgage? Do I need to get a mortgage for 700k to match the original balance I will have paid this loan in full prior to this as my pre pay is up.. so there will be do debt at the time I sell and do the exchange.. does that change anything.

    Thank you in advance.

    @davefoster

    @Jay Hinrichs, you're correct that if you've paid off the mortgage before selling, you generally don't need to take out another $700K mortgage just to match the old one. The important part is how the exchange proceeds are used and the value of the replacement property. And yes, you can generally borrow against the new property later, although I'd have your CPA review the timing and structure of any refinance so it doesn't create problems with the exchange.

    I'm a real estate attorney, broker, and investor based in Maryland, and I work with investors on property transactions, contracts, and ownership matters. From the legal side, one thing I pay close attention to is making sure the purchase and sale are structured properly from the beginning. With a 1031 exchange, I'd want the qualified intermediary involved before the sale closes, especially when financing is part of the plan.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    12h

    @Jay Hinrichs , If you're sale is for $950K and it has not debt then you have to purchase something for $950K (the net sales price if that's a little. less) and use all of the $950K or proceeds to do that (the net proceeds). If there is no debt on the property then the calculation is very simple. You have to purchase as much as the cash in your exchange account if you want to defer all tax.

    If there is debt on the property when you sell, you still have to purchase at least as much as your net sale. And use all of the net proceeds. Let's stay with the example of a $950 net sale that has a $300K loan that is paid off as part of the closing. You have $650K of net proceeds that you have to use to purchae at least $950K of real estate. Does that mean you have to take a loan for $300K out? - No, you could use your own money to cover the remainder of the purchase. But you do have to purchase at least $950K of real estate. Most people don't have cash laying around and have to take out a loan. You could just sell one of your puddle jumpers and use the cash to replace the loan amount.

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