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.

[Rick Garrido]

First, you should speak to your CPA about this. From my experience, a 1031 doesn't necessarily pay attention to the amount of equity you have in a home, just the sell price. You sell property "A" at 1mil you can buy as many properties as you want that amount to 1mil or more to not pay taxes. It's a like-kind exchange so you can technically go from SFR to multi family or commercial since it's under a real estate umbrella. The rules regarding the 45 days for identification of future property and closing within 180 days still apply so as long as you close all the properties within that time you should be fine and pay no taxes for the 1031 exchange.

Good luck!

[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.

[Bill B.]

First, you're talking rentals not primary howm right? If so, it doesn't matter if it's an SFR, a mobile home park, a retail shopping center, or a skyscraper. They can all be exchanged. As Dave mentioned, if you keep cash you pay taxes on it.

You forgot to mention what your gain is you’re trying to defer. Selling for $1M with a $100k mortgage is not taxable, if you paid $1M for it. Selling for $1M with a mortgage of $1.2M is still taxable if you paid $800k for it. 

Make sure your tax savings are worth it.  (15T X Sale price, minus sales costs, minus purchase price, minus a capex. Plus 25% depreciation recapture (about 0.9% of the building value per year owned.) Reinvest all cash received without touching it. (Get a QI like @Dave Foster involved BEFORE the sale.) Then, AFTER the sale, do a cashout refi.  NOT before, IRS isn’t a fan of that.