Capital Gains and s 1031 Property Exchange

[Steve Elling]

Here's one for the seasoned investors and tax experts out there. Trying to verify something:

I have a rental property that is fully paid off that we are considering selling. Based on what I've gleaned online, it appears that we CANNOT use the proceeds (it's worth about $100K above our original purchase price) in a 1031 Exchange to pay off the mortgages on a couple of our other, existing rental homes. If we went that route, we'd have to pay capital gains.

So, as I understand it, in order to escape paying 15% in capital-gains taxes on the profit, the proceeds from the sale can only be used to purchase another property of equal or greater value, and only within six months, per 1031 Exchange rules. 

Does that sound accurate, or am I whiffing somehow? 

[Clayton Mobley]

@Steve Elling Yes, that is correct. You cannot use the CG to pay off properties you already own. In order to use the 1031, the property has to have been held as a long-term investment (ie not a flip and not your primary residence) and you must replace its value AND its Equity (ie you cannot just replace with another prop worth the same amount but mostly funded by debt in order to pull out cash). 

The rules for timing with the 1031 are as follows:

1) you must identify up to three replacement properties within 45 days of CLOSING on the sale of your current prop. 'Identify' doesn't just mean you make a list for your own notes, you have to have Qualified Intermediary in place and they need to be aware of, and properly document, your selections.

2) you must purchase your replacement property within 180 days CLOSING on the sale of your current prop.

Why am I yelling about closing? Because your clock doesn't start ticking until you sign those papers, so many folks start their replacement prop search before they're even officially on the market to give themselves a little extra time. Esp if you think your current property will sell quickly, you need to be prepared to make a move on a replacement prop asap