1031 rules and taxes

[Ryan Yu]

I have a question regarding 1031 property exchange. If I sell a single family house for $1 million which has a mortgage of $100k, can I do the following: I buy a single family house property using 1031 exchange for $1 million and get a mortgage of $700k . So from the sale of the relinquished property I have let's say a total of $850k after paying the mortgage and broker commissions etc. Then I buy a 1031 replacement property for $1 million but get a mortgage of $700k. So of the $850k I have from selling the house I use $300k of it and the $700k mortgage loan toward the purchase of the $1 million house. Now I have $550k cash left over to either buy another properrty or invest it another way. Do I then need to pay capital gains tax on the $550k amount or not? Thanks in advance.

[Dave Foster]

 @Ryan Yu  To defer all tax you must purchase at least as much as your net sale, and use all of the proceeds in your exchange. Anything you take out of your exchange the IRS sees as "taking profit". You can allocate your proceeds in any way as you mentioned. But you cannot touch any of that without paying tax. An option is to purchase another/multiple properties with the remainder of the proceeds to avoid the boot. Then refinance after the 1031 is complete if you want to pull some cash back out.