All Forum Posts by: Peter K.

@Peter K., @Bill B.laid out the gain calculations very well.  And you are correct, in order to defer all tax you must do two things - You must purchase at least as much as your net sale ($10 mil ish).  And you must use all of your net proceeds.

Here's the other shoe dropping however.  If you buy less than you sell.  Or if you take cash out.  The IRS says that you are taking profit out.  You want to say you're taking your original capital or basis out.  But the IRS says no it is profit.  So, like Bill said, if you purchase that much less than you sold you will pay tax on everything until you reach the limits of your gain.  So most likely a 1031 would not benefit you at all.

Your mortgage, your equity and your gain do not matter. To avoid all taxes you must purchase more than you net in the sale. 

Imagine you sold for $10.5M, paid $500k in commissions and closing costs. You have a net sale of $10M. If you buy less than that, you’ll be taxed on it. 

Since you say you have a gain of $3M, then buying less then $7M makes a 1031 exchange useless to you as you will be taxed on the entire $3M. Plus of course depreciation recapture. 

You can buy less expensive properties by buying up to 3 properties. (You can split it further but it’s much riskier and complicated.  You could exchange in to a $1M RENTAL beach house, a $7M shopping center, and a $2M apartment building. But you can not take out any “cash” and you must buy at least as much. So you’ll need another huge mortgage if you borrowed a lot to buy the building.  If you’re sure you can close on all of them you can split your $10M exchange in to 5 or 10 units, but if you don’t buy all of them you lose your entire exchange and get taxed on everything  

Ps. I think I need to clear up a definition for you. You say after your cost basis and your mortgage you’ll have a $3M gain. Your gain has ZERO to do with your gain. In your example if you own it outright or have a mortgage of $9.9M your taxable gain will be exactly the same. Your sales price, minus sales costs, minus your cost basis. Your mortgage doesn’t factor in to your gain. And don’t forget that depreciation recapture, it could be huge if you’ve owned for years. 

Last example using your numbers. You paid $8M with $2M down 10 years ago. You sell for $10.5 and net $10M. You pay off $6M mortgage, have $4M in “cash” but only a $2M taxable gain ($300-$400k?). But you probably have a $700k+ depreciation recapture tax bill on the $2.9M in depreciation you took. 

You can reach out to @Dave Foster if you need a QI or an expert’s opinion. I used him for my exchange last year.