1031 required Total price of replacement properties

[Ray Slack]

I'm selling a rental property for $550k and holding $130k in seller financing for 1 year with a balloon payment next year. I bought the property for $80k.   My questions are these:

1. Would I need to buy replacement properties that totaled $550k ?  or my Basis in the property of roughly $470k ? (rental is vacant land so no deprecation)  Or would the $130k be boot next year when the balloon comes due?

2. If I buy 3 properties that Total the $550k or whatever it is that they need to total and then down the road sell just one of those properties and wanted to 1031 again would I only have to invest the sales price of the property? for instant I would buy 1 property for $400k and 2 properties for $75k to total $550k ..  Then in 2022 I want to sell one of the $75k properties for say $100k.. I would then only have to purchase a new property of $100k or over correct?

[Dave Foster]

@Ray Slack, There's several variables/options for you that will determine the answers to your questions:

1. First ignore the owner carry for a moment - You requirement in a regular 1031 exchange is to purchase at least as much as your net sale ($550K ish) and use all of the proceeds in that purchase.  You can purchase less than you sell and you can not use all of your proceeds.  But the difference is seen as taking profit by the IRS.

2. So in your owner carry example you can carry the note.  If you don't put the note into your exchange account you will pay tax on it as taking profit.  If you do so then you would not need to buy $550K you would only need to buy $420K using the rest of your proceeds.

3. Or you can put that note into your exchange account with the Qi.  And during the exchange process sell it on the note market, or replace it with cash from any other source.  When you do that you now have cash in your exchange account so you can complete your exchange fully and defer all tax.  But you also have a note now outside your exchange account that is tax free except for the interest that comes in each year.

So I guess it would sum up like this

1. Sell and just take the note - Pay tax on the $130K and buy $420K of replacement real estate

2. Sell with no note - pay no tax and  buy $550K or replacement real estate

4. Sell with a note but leave it in the exchange and trade if for cash during the exchange period - no tax and buy $550K of replacement real estate.

Each piece of real estate becomes stand alone.  So if you sold later and wanted to 1031 your requirements would be to purchase at least as much as that net sale and to use all of the proceeds in those replacements.  You are correct.