worth doing 1031 exchange

[Gp G.]

Hi ,

I bought a property around 140k around 6 years back and considering now selling around 350k. I spent so far about 30k each year on repairs and upgrades which was reported in each year tax returns (2024 tax return yet to be filed where  I spent around 30k again).  I still have mortgage with a bank for about 110k to pay. I also have about 80k debt on credit cards which I used for repair of this property. Is it worth doing 1031 exchange in this case or just pay taxes like capital gain taxes and normal income tax on the income.  If I do 1031 exchange how much I can save by going through these additional steps. Please advise

[Jared Smith]

@Gp G. was this a rental property? I am assuming yes, but if not, you don't have to Worry about a 1031.

If it was a rental property you also need to consider how much depreciation you have taken on the property. Based on the purchase price of $140k I would make an assumption that you take between $4-$5k of depreciation per year, regardless of whether you did not not, the IRS makes that assumption for you. So that would be between $20k-$30k reduction to your tax basis, below your purchase so say you are starting at $110k-$120k. Now you add $30k of repairs x 6 years, you are stating you have put in $180k into repairs so add that on to your basis, now $290k-$300k. Your mortgage and CC debt are irrelevant to the discussion other than you won't be able to pay those off if you do a 1031 because you can touch that cash, it has to be handled by a qualified Intermediary (QI) and then put into a new property with equal or greater value. You can also add/subtract closing costs and fees from your transaction to reduce the taxable income.

If these assumptions are correct and you sell for $350k, you would be exposed to taxes on about $50k of the income at about 15-20% depending on the specific tax rate. That would be $7500-$10k of taxes you would owe. A decent rate for a 1031 is around $1250 +/- $250 for the full transaction for a single Property exchange.

If you want that money back free and clear and pay off all of your debt I would recommend foregoing the 1031. If you can't really justify $30k per year of expenses/improvements you would want to reconsider potentially.

1031 folks, does all that sound correct? @Dave Foster