Hope someone can clear up my confusion about 1031’s. I am selling a property for $250,000 - paid $210,000 3 years ago. It is mortgaged for $200,000 which means only about $50,000 profit. Can I do a 1031 using that $50,000 to put down on another property if I take out a smaller mortgage. I.e., if I pay off the $200,000 mortgage and then take another on another property for $100,000, to buy a $150,000 property will this work.
Thanks for any help.
jeannes
I am the local Nashville Rep. for bayview 1031 exchange. If you would like to contact me to help you better understand what you can and cannot do with the exchange I would be more than happy to go over the rules of an exchange. The answer to your question really has more than one part. my number is 615-545-3666. I am a member of the Nashville REIN and will be happy to talk to you anytime. I also have plenty of handbooks on 1031’s that i can sent to you.
( and I will not try to sell you anything… promise)
Regards,
michael
while 1031s can be quite complex, there are two pieces to under stand in your situation. Equity and mortgage relief. Because you are taking mortgage that results in a net mortgage relief that is larger than you profits, in effect you will not have performed a 1031 and all gains will be taxable.
jeannes,
The first hurdle to clear involves the property itself. If the property you are asking about is your primary residence or a second home, then it is not eligible to participate in a 1031 exchange. If the property is being held as an investment property, then a 1031 exchange is possible.
If you have cleared this hurdle, then your next step is to contact a qualified intermediary to facilitate your exchange. A qualified intermediary must hold all the proceeds of the sale (your $50K equity in this case) and apply all of the proceeds of the sale to the acquisition of your replacement investment property. You must have a written exchange agreement in place and the buyer of your relinquished property must be a party to the agreement. Your qualified intermediary can provide all the specific details.
Qualified intermediaries do charge a fee. Make sure you understand the fee structure. And shop around if you can. The fee should be the lowest if you will be directly deeding your relinquished property to your buyer and receiving the replacement property deed directly from your seller.
You will have some strict timelines to meet as well. From the date of settlement on your (relinquished) property, you will have 45 days to identify up to three potential replacement properties, and another 135 days after that to acquire one or more of your identified replacement properties.
In addition, you must trade up in value to keep the exchange fully tax deferred. As long as the value of the replacement property is at least as much as the value of your relinquished property then you will have a fully tax deferred exchange. You are not restricted to only acquiring one property, either. If you need to acquire two or more properties to meet the greater value requirement, you can do so, as long as all properties were identified within 45 day identification window.
If you replace a $250K property with one $150K property as per your example, all of your profit from the sale of your relinquished property will be taxable capital gains. Indeed, you will have so much taxable gain, that you will have completely negated the benefit of the exchange. If this is what you want to do, don’t bother to open an exchange in the first place.
Yes, you have complete flexibility in structuring your financing for the replacement property. In a forward exchange, structured as I have outlined, there is no requirement to trade up in debt – you only need to trade equal or up in value. You can pay all cash for your replacement property, own it free and clear, and still have a valid exchange.