1031 Exchange getting the "boot"

[Tyler Brown]

Hello, we recently completed a sale of our apartment complex for $850,000 that was on a standard commercial loan. We used a 1031 exchange intermediary and then purchased a condo in Florida all cash for $360,000. We were under the impression that we could at least get partial tax deferral even though the purchase price was not as high as our sold asset. The intermediary never said there was any problem, but now our accountant is stating that the 1031 exchange "failed" and will be treated as a normal sale. Is there truly no way to get partial tax deferral? If not, is this something the intermediary should have warned us about and should we ask for a refund from them?

[Dave Foster]

@Wayne Brooks, It's not unheard of.  QIs come in all different shapes sizes and quality.  Or it could just be a miscommunication between @Tyler Brown and his QI.

Tyler, Wayne laid out the two reinvestment requirements perfectly - 1. Purchase at least as much as your net sale and 2. You must use all of the cash if you want to defer all tax.  It sounds like you wanted to do a partial exchange - purchase less than you sold.  This is fine.  But what you have to understand is that the IRS says that any amount you purchase less than you sell, or any amount of cash you take out is a way to take profit out.  and the difference is taxable.

Many folks want to say that they are taking their original capital out.  But when you do a 1031 exchange the IRS says, "No, you are taking profit out first."  So I can only guess that your purchase price was so much lower that the difference between what you sold for and what you purchased for was greater than the total of the profit.  In that case you would have no tax savings.  I'll pm you with a link to a youtube video I've done on the topic that will help.

But verify that and make sure that your CPA understands that you can do a partial exchange and that it is not all or nothing.  I literally had that chat with a CPA this week.  They don't all understand either.  

I guess that's good for my job security :)