What happens if I don't spend all my 1031 funds?

[Justin Summers]

Bought a house for $225k and sold it for $425k  so roughly $200k in capital gains. 

I did a 1031, 5 months ago,  and identified $800k worth of properties (200% rule) Looks like I am only going to be able to buy either $160k or $260k worth of the identified properties, not the required $400k-425k

My question is :  Does 1031 have any savings effect on my taxes when only buying $160k or $260k of properties?  or should I just dissolve the 1031 and tax like a normal sale? 

Thanks

justin

[Dave Foster]

@Justin Summers, The key is what your net sale was of your old property.  The 200% rule only impacts what you identify not what you actually purchase.  In order to defer all tax you must purchase at least as much as your net sale.  And you must use all of the proceeds from the sale.  @Scott E., you don't technically have to carry the same debt.  But you do have to purchase at least as much as your net sale.  So, you can use your own cash to supplement the cash from the sale.  But most people just end up replacing the debt.   But it not a requirement.

So your options Justin would be

1. Go ahead and purchase a less expensive property and pay tax on the difference.  If your sale was $400 and you purchased $260 then you would pay tax on the $140 K difference (as long as there was that much profit in total).  But you would shelter any remaining profit over the $140K

2. Purchase more than one property.  Buy a property for $260 and one for $160.  that meets your reinvestment target.  And you can allocate your proceeds any way you want.  Pay cash for one and use maximum leverage for another.

3. If you can't do #2.  And if there isn't more profit than the difference between what you sold and what you buy then there is no need to complete the 1031.  But since you're past day 45 the QI is required to hold your proceeds until day 180.  So if you need the money before day 180 to buy one of those properties there's no reason not to use the 1031 vehicle to complete those purchases.