When Your Debt is Higher Than Your Basis

[Joe Colasuonno]

I have a property I am selling this week.  I purchased the property in 2012 for $45k.  I put an additional 40k into the deal in capital improvements in 2012 as well.  I refinanced the deal for $90k, and currently have $75k in debt on the property, but my basis is only $68k.  

I am selling for $160k, and walking away with about $75k in profit after closing costs.  I will be 1031ing the full 75k into a new property that I am purchasing for 900k.  I need to come to the table with 180k to close (75k from my 1031 intermediary, and 105k of my separate funds).  

Being that my basis in the original property I sold was 68k, the IRS looks at my sale as if I make a total of 82k instead of the 75k I actually walked away with from the closing table.  Do I have to pay capital gains taxes on that 7k difference?  Or being that I am buying a property and putting more than just the 75k into the purchase, can I 1031 the full 82k on paper?