1031 Exchange - can you reduce your investment value (no loan)

[Karla Slyngstad]

Hello.  I need to sell my home that I've rented out for the last 11 years to reduce my debt.  It should sell for $875 and I owe $430.  To avoid capital gains I would like to reinvest, without a loan.  Can I do a 1031 for a rental home with a value of $400K?

Thank you!

[Dave Foster]

@Karla Slyngstad, in your example you would be taking what is commonly called mortgage boot (lessening your debt) to the tune of approximately $345K.  There IRS will tax you on that if there is that much net profit.  However, if your profit (the difference between your adjusted cost basis and net sales price) is greater than $345K then you would have some tax savings.  If, for instance you had profit of $445K and followed your scenario you would pay tax on the $345K boot but would shelter the other $100K of profit in the 1031.