1031 question

[Jules H]

I have an investment property which I'm thinking of selling, its worth approx $900k,  I paid $480k, and owe approx $300k.    I was thinking of doing a 1031 exchange,  but confused whether I need to buy another $900k property to qualify or I can buy a property at $600k instead.   I heard that it should be same or greater value and you need to have a greater mortgage,  but also heard that you can do the exchange and pay taxes on the difference.      

[Bill Exeter]

Hi @Jules H,

You would need to buy one or more replacement properties that have a total combined purchase value of at least your "Net Sale Price." Your Net Sale Price is the Gross Sale Price of $900,000 less your routine selling expenses such as broker's commission, title fees, escrow fees, recording fees, exchange fees, etc. You would not subtract any loan payoff nor would you subtract any operating expenses such as prorated rents, HOA fees, etc. Your Net Sale Price is likely around $840,000.

You can trade down in value, so if you sold for $900,000 and reinvested into one property with a purchase price of $700,000, you would have $200,000 in taxable gain. 

So, in order to defer all of your taxes you must trade equal or up in value based upon your Net Sale Price and you must reinvest all of your cash (equity).  You can trade down, and many do it for strategic reasons, as long as you understand that you are going to pay taxes.