Anyone ever 1031 into a Property of Lesser Value & Lower Debt?

[Steve Mitrano]

Hello All,

I’m curious if anyone has sold a property and used a 1031 exchange to purchase a property of lesser value, while also taking on less debt than the previous loan. To clarify, I rolled 100% of the proceeds into the new property. My question is whether performing a cost segregation study would be a good strategy to defer some or all of the taxes I might owe due to both cash boot and debt boot.

Thanks in advance for any insights or advice!

[Bill B.]

The reason it’s usually not done is the profit isn’t pro-rated, it’s consider $100% first. So if you had a $100k gain and did an exchange from a $900k property to an $800k property you would owe the same taxes (on the $100k gain) as not doing an exchange. 

So…either the cheaper property has to be close, or the gain has to be massive. 

@Dave Foster could probably tell you where the 25% taxed depreciation recapture figures in. If that comes before or after your capital gains taxes.