1031 Exchange on an Underwater property?

[Andres Felipe Aristizabal]

Hello BP community,

I recently ran into this idea of a 1031 exchange on an underwater property and was hoping to find out more about how the process works along with the requirements for being able to do so. If anyone has any personal experience with it I would love to hear about it. The fact that you can be taxed on what was referred to as a phantom gain when selling the property blew my mind.

Thank you in advance,

Andres

[Christopher Phillips]

@Andres Felipe Aristizabal

Yes. Depreciation recapture on a rental property that is still under water on the mortgage can create a problem at tax time.

One out is to do a shortsale 1031. You do the shortsale as usual and setup the 1031 at the same time. Of course, you need to be in a position to buy a replacement property in order to make it work.