1031 Rules - purchase price or profit?

[Mindy Jensen]

I've never done a 1031 personally. Would absolutely get someone qualified involved. That said, I have a client with a condo she bought for $100k and is now selling for $190k. In order to comply with 1031 rules, does she have to purchase a new property for $190k, or does she have to purchase only for the profit she made, which would be $90k.

Numbers and scenario are for the sake of simplification. I know there is a tight timeframe in which to choose a new property, specific dates to close, etc. 

[Dave Foster]

@?James Jasunas and @?natalie Kolodji thanks for the shouts out.  @Mindy Jensen, if she wants to defer all tax she needs to do two things reinvestment wise.  First she must purchase at least as much as her net sale (the contract price minus normal costs of closing).  Second she must use all her net proceeds (net sale minus mortgage payoff) in the replacement purchases.

Using your numbers, if the contract is $190 and there are $10K in closing costs then her net sale is $180K. A mortgage of $90K would leave her with proceeds of $90K.  So in order to defer all tax she must purchase at least $180K in real estate using all $90K to do so.

She can purchase less than what she sells or she can take cash but what ever she buys down or whatever she takes in Cash is consider to be profit first.  so she would pay tax on that amount but shelter the remainder.

One answer is exactly what you suggested - purchase more than one property using the cash proceeds as down payments.  She can allocate that cash in any way she wants as long as she purchases at least as much as she sells and uses all the proceeds - to defer all tax.