1031 Exchange What is Your Down Payment After Profit Called

Commercial Real Estate Investing
6yFollow

1031 Exchange What is Your Down Payment After Profit Called

Kim Hopkins
Investor · Member since 2018 · 259 posts · 74 votes

This is a confusing question. Let's say I put down $100,000 into a property which I then sell a few years later for $150,000. Now let's say I 1031 that into a new property with a total down payment of $225,000. If I'm calculating my cash on cash, the technical definition would be the cash flow divided by the $225,000. 

However, I also think it's worth calculating my cash on cash based on the total cash I actually put down (took out of my pocket). Call that "Adjusted Down".  In this case, that would be the original $100,000 plus the additional $75,000 (=$225k-$150k) I needed for the new deal for a total of $175,000 in Adjusted Down. 

It make more sense to me to calculated the cash on cash using this Adjusted Down of $175,000 in the denominator (vs the $225,000) since the $50,000 I threw into the new deal as profit from the old one gives me an infinite return. 

Does this make sense to anyone else? Does this "Adjusted Down" number have a name? 

Thanks and sorry if I caused you brain pain.

Kim


0Reply
29 views

Most Popular Reply

Greg Dickerson
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y

@Kim Hopkins all the cash invested is used to calculate returns regardless of where it came from or when. It’s still cash that’s tied up in the deal.

If you refinance all of your cash out of the deal and keep the property then your return moving forward would be infinite.

1Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Kim Hopkins brain pain??? Love it .  What you're calling the "adjusted down" . is actually the down payment.  Although your basis transfers forward in a 1031 each subsequent property stands on its own.  It is your cash contribution.  It's the only number that works for that calculation.  Because your cash on cash return is really an exercise in opportunity cost without consideration of leverage and other tax benefits.  I am making 10K/year on an asset that I put $250K down on.  that makes my cash on cash 4%.  The comparison is what could I receive in return if I placed that $250K into something else.  If I make $25K on a property that I put $250K down on then I'm making 10% cash on cash.  

    You won't get accurate comparative data unless you consider all the cash you put down.  Now as a side note what your additional down payment did was buy you additional depreciable basis.  that is a tax consideration that you would hold up beside your return to see if the tax benefit makes your cash on cash return comparable to a property that has greater cash on cash but less tax benefit.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    @Kim Hopkins all the cash invested is used to calculate returns regardless of where it came from or when. It’s still cash that’s tied up in the deal.

    If you refinance all of your cash out of the deal and keep the property then your return moving forward would be infinite.

    1Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    6y

    I think youre also confusing "simple" analogies with what happens in real world with depreciation, reduced basis, etc.

    It can easier to talk to your CPA using actual numbers.

    0Reply
  • Kim Hopkins
    OP
    Investor · Member since 2018 · 259 posts · 74 votes
    6y

    @Dave Foster I don't think the adjusted down is my down payment on the new property. The Adjusted Down is $175k in my example, whereas the total down payment is $225k. The difference is the profit from the sale of the relinquished property. 

    @Greg Dickerson I agree with your point that all the cash is tied up in the deal. But it still makes sense to me that there would be an adjusted cash on cash calculation that looks at cash return over capital you took out of your pocket versus the profit portion you made from the exchange. Like a compounded cash on cash... : ) Money you didn't put in is now making money.

    I swear this should have a name...

    1Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Kim Hopkins:

    @Dave Foster I don't think the adjusted down is my down payment on the new property. The Adjusted Down is $175k in my example, whereas the total down payment is $225k. The difference is the profit from the sale of the relinquished property. 

    @Greg Dickerson I agree with your point that all the cash is tied up in the deal. But it still makes sense to me that there would be an adjusted cash on cash calculation that looks at cash return over capital you took out of your pocket versus the profit portion you made from the exchange. Like a compounded cash on cash... : ) Money you didn't put in is now making money.

    I swear this should have a name...

    When you sold the property and earned a profit that is the same as cash. You chose to do a 1031 instead of bank the cash. That’s the same thing as coming out of pocket. There is no difference. Once you realize a profit that is cash.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Kim Hopkins, Yep you're right.  I misread.  Either way you're going to overstate your return greatly if you don't include all of the cash you have in that property.  So $225 would be your number to use as your cash down.  If that deal took $225 of cash to get into then all $225 is generating return on that project.  But all $225 is also lost to another opportunity.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Kim Hopkins
    OP
    Investor · Member since 2018 · 259 posts · 74 votes
    6y

    @Dave Foster @Greg Dickerson 

    I see what you both are saying. However, I still think there should be a name for this "cash on original cash". You have a good point when comparing it to taking your money out entirely. However, I guess I'm looking at the opposite. It almost measures the opportunity cost if you hadn't sold the property. 

    What I was really after was the fact that we have a lower cash on cash in the new property (because of this market primarily) compared to the original property, but we didn't have to put in any additional cash because of the profit we made on the sale. Still think that should be factored in some way. 
    Oh well, maybe it will be figured out at some point! 

    Thanks!
    Kim

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free