Taxing non-capital gains?

[Joseph Key]

I bought a rental property for 100k 14 months ago. I put roughly 20k into it in renovation expenses. For discussion, let's just say all other expenses sum to be 10k (interest expense, etc.) for a total of 30k in expenses. I'll begin to realize my gain after 130k. After paying on the note for a year the outstanding mortgage is 70k. 

A buyer is willing to pay 200k for the house giving me a gain of 70k. I want to buy a lot that costs 75k. Can I exchange the 70k gain from the rental property into the lot and avoid paying tax on it? Will I be taxed on the 60k (30k of equity and 30k of expenses) that I received back? Will I have to also exchange this into a new property?

thanks!

[Dave Foster]

@Joseph Key You're seeing a gain of $70K.  @Jay Jasunas is factoring in the depreciation recapture component.  You also want to make sure of what you selling costs are because they will lessen your gain.  But whether you end up closer to your $70 or Jay's $90 the fundamental question has to do with how the 1031 works.

The IRS in essence doesn't care how much your gain is if you are doing a 1031.  The requirements to defer all tax are that you purchase at least as much as your net sale and you use all of the cash from the sale to do so.  

You can take cash out and you can buy less than you sell.  But the IRS will tax the difference as if you are pulling profit out.  When you do a 1031 they do not count a return of your basis or expenses first.  They say you are taking profit out first.

So to your example.  If you only reinvested $75K you would be buying down by approx $125K.  So you would be taxed on that $125K as if you were taking profit first.  Since your total profit is $70K - $90K you would still pay the full amount of tax.  So no reason to do the 1031 exchange.

Now if you sell for $200 and buy the lot for $75 and another house for $100K in a 1031 you are only purchasing around $25K less than you sold.  So you would pay tax on the $25K and shelter the remaining tax in the 1031.