How would this scenario play out?

[John LaVecchia]

If I buy a property for $140,000 and 2 years later it sold in a 1031 exchange for $60,000 but I have a loan on it for $130,000 can I buy a property for $260,000 or $120,000? Or am I completely off?

[Dave Foster]

@John LaVecchia, if you bought a property for $140K and sold it for 60K you have a huge net loss so no need for a 1031.

However if you dropped a 2 at the beginning of that sales price then you are both happy and able to do a 1031 and shelter a bunch of taxes.

The two part rule for reinvestment is that you purchase at least as much as your net sale (contract price minus closing costs).  Ball park that at your $260K.  You need to purchase at least $260K in order to completely defer all tax.

Secondly you must use all of the net proceeds (net sales price minus mortgage  payoff).  In your case that is $130Kish.  In order to defer all tax you must use all $130Kish in the next purchase.

You can purchase less than what you sell and you can take cash out but the IRS says that's a way of taking profit so you would pay tax on the difference and shelter the rest of the gain, if any, in the 1031.