1031 Exchange - Downpayment on target property

[Terry N.]

Newbie trying to understand 1031. I know much has been discussed but not finding answer to these particulars.  Any input appreciated! 

Say I am able to sell my current property for $400k.  

Loan balance = $200K. Purchase original price was $250K.  A gain of $150K. 

I need to purchase in kind a subject property also valued at $400K.  

Do I have to put $150K of the sale into the property since that was the gain?

Assuming 8% of sale goes to fees and expenses ($30Kish - would love that to be less!) 

$400k Sale minus loan balance ($200K) minus sale expenses ($30K) minus deposit ($100K) = $70K

If I have to put $150K into it that $70K is reduced to $20K...which I'd be OK with...$70 would be better though.

Any help appreciated!

TN

[Dave Foster]

@Terry N., The easiest way to understand the reinvestment requirements is as a two part rule.

In order to defer all tax you must purchase at least as much as your net sale.  This is your contract price ($400K) minus closing costs ($30K) = $370K.

Second you must use all of your net proceeds in the purchase or purchases.  This would be the net sale price ($370K) minus the loan payoff ($200K) = $170K

So in order to defer all tax you need to purchase at least $370K in investment real estate using all $170K of net proceeds.  You do not technically have to take out a new loan if you can replace that with cash from any source. Most folks don't have access to that kind of cash so they end up taking out a new loan.

You can purchase less than you sell.  And you can take cash out as well.  But the IRS says that any amount you purchase less than you sell or any cash you take out is first going to be profit and you would pay tax on that amount but would still defer the rest of the profit in the 1031.  So if you try to take out your original capital. The IRS says it is not your original capital when you do a 1031 but profit.  And they make the rules - bummer!

The only way you can use 1031 proceeds for a renovation is with a reverse or improvement exchange.  You cannot take title to a replacement property until you sell . your old property.  And you cannot exchange into improvements on a property you already own.  In a reverse, the QI takes title to your new property while it is being renovated.  Then when complete you finish your exchange by taking title from the QI.  A complicated and more expensive process but many times well worth it.