1031 Exchange Common Questions

How much money do I need to reinvest into the replacement property?

In order to defer all of the capital gains tax in a 1031 Exchange, the value of the replacement property(s) must be of equal or greater value than the property that was sold.  If the value of the purchase property is less, tax will be applied to the difference.  In addition, all the cash proceeds (after any liens have been paid) must be rolled into the replacement property with tax being applied to any amount not reinvested. 

An example:  Property A sold for $500,000 and had a mortgage of $300,000 resulting in cash proceeds of $200,000. 

• The client doing a 1031 Exchange puts $100,000 down payment each on properties B and C which are each being purchased for $350,000 apiece.  Total cash used is $200k and total purchase price is $700k.
• In this case the exchanger 1. Reinvested all of the cash ($200k) from the sale, and 2. Purchased property of greater value than the sales price ($500k) and therefore met all the requirements to defer the taxes. 

In the same example: If the down payment was reduced to $50,000 each on properties B and C and their price was reduced to $200,000 each, the taxpayer would need to pay some taxes. Total cash used is $100k and total purchase price is #400k.

• Only half of the $200k in cash was reinvested, so the difference of $100k could be taxable. 
• Additionally the total amount of property purchased was $400k, or $100k short of the sales price of $500k, so tax could be assessed on the $100k difference. 

Contact the 1031 Exchange Specialist or call us at 866-405-1031