Question about 1031 exchange

[Dennis Cronk]

I have a former residence (condo) that I held as a rental when i moved out about 15 years ago.  About 10 years ago i refinanced the property to take cash out.  Now I would like to sell it and purchase something bigger.  Because of the refinance, my capital gain is significantly more than my equity.  If i want to do a tax deferred exchange, even if I reinvest all of my current equity, will i have to pay taxes on the difference between the gain and the equity?  Thanks.

[Dave Foster]

@Dennis Cronk, Yes unfortunately it could be that even reinvesting all of the equity (proceeds from the sale) you would still have a taxable event if you do not also purchase at least as much as your net sale.

When you do a 1031 you do get the opportunity to defer all tax if you do two things related to the funds.  First you must purchase replacement real estate at least as much as your net sale (the contract price - closing costs).  Second you must use all of your proceeds in the next purchase as well (net sale - loan payoff or the equity you are referring to).

You don't have to do this but the IRS position is that every dollar  of equity you remove (taking cash) or ever dollar you purchase less than what you sold is first considered to be taking profit and it is taxable.  

You can do a partial exchange and pay tax only on the amount you buy less than what you purchased.  But you'll pay tax on the difference until  you've paid as much tax as you would have if not doing the 1031.  There are some things that can be done to mitigate but it needs some fleshing out to see what's appropriate for  you.