1031 Help - new property financed with a mortgage

[Avrohom Roth]

Client Sells a property (which was owned by his LLC #1). LLC #1 then takes the proceeds and distributes it to LLC#2 which is fully owned by LLC#1. LLC#2 uses the funds to purchase a property a complete the 1031 exchange.

An qualified intermediary has been involved and all is documented properly.

Here's where it gets confusing.

When LLC#1 sold the property it had a deferred gain of $1,000,000 of the sale of a property for $2,000,000.

LLC#1 did not send the whole $1,000,000 to LLC#2. It sent $500,000. LLC#2 then used the $500,000, together with mortgage to purchase a new property for $2.5m, this way completing the 1031 exchange.

ON the books of LLC#1 I have a deferred gain of $1M. HOw am I reducing that when the exchange is complete?

Right now I have it as no deferred gain and a negative investment in LLC#2 for $500,000 ($500,000 actually invested - $1,000,000 deferred gain = -$500,000).

Is this correct? can anyone shed some guidance?

Or, I guess another way to ask this question is...... if you purchase a new property for more than you sold the old property, but you do not use the cash to purchase a new property, you go out and get financing for the new proeprty, is that a problem?

[Eric Black]

Hi Avrohom,

My first suggestion would be to talk with your CPA and RE attorney, although if the deal is already done then you can't go back and change anything.

In answer to your last part of the post, it's not a "problem" if you don't use all of the proceeds from the sale toward the purchase of the replacement property however any money that is not used will be taxed as a capital gain.

I have done one 1031 exchange and this is my understanding. I'm not a CPA or attorney, and your situation is much more complex so again, I would recommend starting with your CPA.

Best of luck.

Eric Black