1031 Exchange Debt Question

[Bert Nethercot]

I am thinking of selling a rental property utilizing the 1031 exchange process.  Using round numbers for this discussion, I currently owe $150K, and should be able to sell it for around $340K.  After expenses, I should net approximately $180K.  I understand that I will need to purchase at least $340K in income property per the 1031 rules, my question is will I have to maintain at least $150K in new debt as part of the new purchase transaction, matching the current debt of $150K that I have on the property being sold?  

[Dave Foster]

@Bert Nethercot, You've got it right.  The two part rule on valuation is that in order to fully defer all tax you must purchase at least as much as your net sales price (contract price less closing costs but before mortgage payoff).  And you must use all of the net proceeds from the sale in your purchase of replacement property.

In your example you will need to purchase a property or properties worth at least $340K ish and use all $180K ish to do that.

There is no specific requirement to replace a mortgage of similar amount although that usually ends up happening in order to fill the gap between the 180 and 340.

You can purchase less than what you sell and you can also take cash out of the sale but you will pay tax on that while still sheltering the rest in your 1031.