1031 Exchange advice

[Jen Hoang]

I have a property that I would like to do a 1031 exchange. The property is valued at $440k. I owe $140k. Let’s say that the sale generates $300k profit for simplicity. (Not included closing costs etc) 

1.  I need to purchase another property that is at least $440k and have at least $140k mortgage? 

2. I need to put that entire $300k as a down payment another property? So that $300k could be a 20% down on a $1.5M property? 

3. Do I start looking into new properties now before I list it to sell?

4. Any recommendations for a qualified Intermediary?

[Dave Foster]

Thanks for that shout out @Bill B..  @Jen Hoang, you're pretty much on the nose if you want to defer all tax - you must purchase at least as much as your net sale and use all of the proceeds in your purchase or purchases. @Tracy Ross is right - you can do a partial exchange.  Any amount you purchase less than your sale, or any amount of cash you take out will be taxed as profit.  But it won't affect any remaining profit you leave in the 1031.

Here's a couple thoughts that you'll need to think about to make a good decision.

1. In the situation you describe you'll have a much great gain than $300K because you'll have 18 years of depreciation recapture to deal with.  This can also be deferred in the 1031.  But you just want to know that there's more tax to be deferred than you think.

2. You technically do not have to replace the mortgage.  What you have to do is purchase at least as much as you sold and use all of your cash to do it.  Some folks will use their own cash to add so they don't have a mortgage.  A lot of folks can't do that so they take out a new mortgage.  But it's not strictly required.

3. You don't have to purchase only one property.  As long as the total of the replacement properties meets your reinvestment target you'll still defer all tax.  And this leaves you with some interesting options because you can allocate your proceeds any way you want.  Maybe purchase one property with cash, and use a mortgage to purchase a second one.  Or like your plan use it all as a down payment on a much larger property.  

4. You can definitely start looking now.  And if you find a good property replacement you can go into contract for it at any time.  You just can't close your purchase before closing the sale of your old property.  So if you want to get into contract make sure that you negotiate an extended or contingent closing to accommodate the sale of your old property

All good options - And I'll reach out via pm.