Questions on 1031 exchange

[Brian O.]

Hello All,

In Nov 2011 I purchased a empty lot in a high end neighborhood for 175k.

I am in process of selling the lot (bidding war going on now) I have 4 offers at 260k so I will have a solid ROI on this deal. I am looking to understand more on 1031 exchanges. The property has a balance of 30k . Do I have to use all proceeds from the sell of the property to acquire my next investment property? I figure I will have about 220k or so in cash. But only about 90k in profit (before I take out carrying cost taxes etc.) can I just use the 90k for the exchange or do I have to use all proceeds 220k towards a qualified property. We are looking to move very soon and would like to take the 130k or so and use it for down payment on our new home.

Thanks everyone !

B

[Brent Bonine]

Brian,
We get this question quite often. In order for you to defer your capital gains tax, you need to reinvest into a property that is of equal or greater value than the property you are selling. You must also move a corresponding amount of debt into your new property.

Many investors think that they are allowed to take their principal out and only reinvest the gain or proceeds. However, the IRS doesn't allow this. They assume that if you improve your financial situation that you are taking the gain first and therefore you are responsible to pay taxes on that.

The other point to consider is that you mentioned that you want to use the proceeds for the purchase of your home. If you are going to live in this home, it is considered personal property and not investment property and is not eligible for a 1031 Exchange transaction.

I hope this helps