Technical question about 1031 exchange

[Mirko Lopez]

I want to do a 1031, selling an investment condo and buying an investment house.  Eventually I will live in the house but that is down the road.  My problem is with the concept of "boot".  I have been a broker for a long time, so I understand the basics.  Problem is that the condo is free and clear so I will clear around $200k but the gain part of that is only around $100.  I would like to re-invest my gain but not the whole proceeds.  Any suggestions?

[Bill Exeter]

Hi Mirko,

The requirement for a 1031 Exchange is that you must remain fully invested, which means that you must reinvest your net sale price. The net sale price is the gross sale price less routine selling expenses such as broker's commission, title insurance (unless lender related), escrow/closing agent fees, recording fee, exchange fees, etc. Do not subtract any lender related/required costs (if any) and any operating items such as prorated property taxes, prorated rents, HOA fees, etc. So, as long as you buy one or more replacement properties that have a total purchase cost, including routine purchase costs similar to the routine selling costs mentioned above, equal to or greater than the net sale price and you reinvest all of your equity (cash proceeds) you will defer all of your taxes. If you end up with cash left over, you will have taxable cash boot.

In your example, if your gain is $100,000, then your cost basis is greater than $100,000.  If you reinvest only $100,000, you will have traded down sufficiently in value that you will recognize all of your gain and pay the corresponding taxes (and defer nothing).