Do losses offset the original gains on 1031?

[Josh Carlegis]

Odd 1031 question.... Say you had $305k on a 1031 exchange that you used to purchase a small MFR. You mismanage it and it gets run down and dilapidated. An investor comes and pays you $100k for the distressed property. You lost $205k on the deal. What is your tax burden from the original 1031? Would it be $100k ($305 basis-$205 loss)? Or are you still responsible for the original $305k?

[Dave Foster]

@Josh Carlegis,  The only way for there to be $305K gain and the purchase price be $305K would be if there was a $0 basis.  That could happen but that would mean that if he sold a property with a $0 basis for $100K and his gain would be $100K.  

Think of it as the basis of the old property carrying forward in the new property.  It is the basis that determines gain upon sale and not the purchase price.