1031 transfer

[Erik Williams]

I was wondering if anyone could answer a couple questions about 1031 transfers.

1. Does the 1031 transfer have to be for the complete sale price of the property, or can you take out your original investment and just transfer over the proceeds on the property to the 1031?  (ie: bought the property for $100,000, sold it for $200,000, can I take the $100,000 of proceeds and put it in a 1031 transfer while using the $100,000 of original investment for something else and not pay any capital gains on the sale of the property?)

2. If the property is a rental property that I put into a 1013, can I by a vacation property that I will also rent out has my next property and use the 1013 transfer for that purchase.  

Thanks for any and all help.  

[Dave Foster]

@Erik Williams

1. If you want to completely defer all tax you must buy at least as much as you sell and you must use all of the proceeds from the sale in your next purchase or purchases.  The IRS position in return for giving you 1031 treatment is that any money you take out or any amount you buy less than what you sell is a form of taking gain.  You can do it and complete a partial exchange but you will pay tax on that amount as if it were gain.  So in your example if you bought it for 100K and sell it for 200K there is 100K of gain.  In order to defer all tax you need to buy at least 200K.  If you buy 150K and take 50k in cash out you would pay tax on the 50K you take and still shelter the tax on the other 50K of gain.  If you buy for only 100K and take 100K in cash out you would pay tax on the 100K you take out and since that is all of your gain there would be no reason to complete a 1031 exchange.

I know you want to call it your original capital but the IRS says, "No that's gain first".  They have nuclear weapons.  They win the argument.  But partial exchanges are very common.  

2.  @Karolis Matulis is correct you must re-invest in "like kind" properties.  But like kind is defined by use not type.  Any property or type of property that has been purchased with the intent to hold for productive use in business, trade, or for investment may be exchanged for any other property or type of property with the intent to also hold for productive use in business, trade or for investment.  So your example of selling a rental property and buying a vacation rental property that you may also use some for personal use is absolutely permitted by both case law and statute.  There's some accounting things and limits on use that you'll want to watch for but again this happens all the time.

the way to access cash if you want is to complete a full exchange - sell for 200K and buy for 200K and immediately after your purchase do a refinance and take out the 100K you want.  This keeps the integrity of the 1031 intact and still gives you the cash to do what you want.