Partial 1031 details?

[Bob McKee]

This group has been a tremendous resource for me. Thank you! One thing I am still a little confused on relates to partial exchange. I know that is blasphemy for some of you (haha) but I have my reasons. Simplified Scenario for example purposes: 1) Sell for $700K with Mortgage of $300K 2) Buy 1 property for $300K and $100K down 3) Buy 2nd property for $300K and $100K down 4) After fees it nets me $100K cash that I take out Result: I cover my minimum mortgage threshold by $100K but I fall $100K shy of Minimum Purchase Price AND I take out $100K in cash. Assuming my depreciation is approx $40K (where I pay 25%) - what is the rest of my tax? Do I have to pay 15% on $160K (100+100-40) or some other number (hopefully less that that)? I realize there are other taxes (State, healthcare, etc) - I am just trying to figure out how to calculate the number that gets taxed. Thanks!

[Dave Foster]

@Bob McKee You pay tax on what you are short of in your reinvestment target.  Either taking cash out ($100K) or buying less than what you sell ($100K) would be considered boot.  But you do not combine those two in determining your taxability.

In your example you would pay tax on that $100K.  There is debate on whether that boot is considered gain or depreciation first.  There are those who maintain that your recognition of gain begins with depreciation recapture.  There are others who staunchly maintain that the purpose of a 1031 is to carry the basis forward so the first dollar of boot out counts down from the top.  I have seen CPAs treat it as either one.  So depending on your CPAs druthers you will pay either 15% as a capital gain (if that is where you fall on the scale) or 25% as depreciation recapture.