How much must I reinvest?

Question

I'm selling an investment property for $915,000, commission is $35,000. My original purchase price was $550,000, and I've depreciated about $50,000. I financed it 100%, and have been paying interest only, so I still owe $550,000.

In my original reading up on 1031s, it seemed as though I could just do a 1031, buying a replacement property for at least my realized gain (about $380,000) and avoid any income taxation on the sale.

But after more reading, that doesn't seem to be the case? I would have to buy a replacement property with at least $550,000 of debt and at least $380,000 of equity? Is that right? Just wanted an understanding of this before I meet with a 1031 expert.

Thanks.

Bill Exeter · Answer

Hi Dal1,

I completely agree.  The IRS was certainly criticized by the Inspector General last September for failing to provide adequate supervision (audit) and instruction (guidance) over 1031 exchanges, especially those involving vacation properties and second homes, which were just addressed in Revenue Procedure 2008-16.

Lynn Z · Answer

The problem with the trading "up" is getting the tax reporting straight.  The excess  basis has to be capitalized and the basis is continued from the relinquished property.  If two tax years are crossed,  all cpa's and accountants appear  confused.   Instead of auditing `1031's the IRS could give us more guidance don't ya'll think?

Bill Exeter · Answer

You must trade equal or up in value based on your net sales price (gross sales price less routine closing costs) and not equity and you must reinvest 100% of your net equity (cash position).

Ryan Webber · Answer

You have to have equal or greater debt and equal or greater equity in the property.  Meaning if you sold it for $930,000 with $550,000 debt and $380,000 equity, then you will be looking to buy one or more properties with a total of at least that much debt and at least that much equity to qualify all of your gains for the 1031 tax deferment.  You can take out some of the proceeds, but you will be taxed on your "boot" as its called.

Doug Dias · Answer

Hello there,

I've read a little about 1031s. I believe the replacement property has to be greater in value than your current property.

However, with those numbers i'm sure you can find some good cashflowing opportunities. :)