1031 Question

A thought occurred to me while driving to work this morning. If someone owns 2 properties and sells 1 of them can they roll the profit into the other property tax deferred? For example if there is $100k profit from the sale can a $100k payment be made with that money towards the mortgage of property number 2? Obviously it would have to be done through an intermediary but would this work on something you already own or would it have to be a new purchase?

The $100K would be taxable boot, assuming the QI would even do the transaction.

So this only works on new purchases? I would be taxed then would be able to use the money towards existing properties? That’s crappy. :frowning:

That’s the way I read the law. You aren’t transferring basis to the other property. You are simply paying off a loan.

You can use a 1031 exchange to buy a TIC investment. Hold it until you die and your heirs get stepped up basis. If it cashes out early, you can transfer into another TIC.

TIC? Tenant in common?

You must be exchanging ownership; either in part or whole, to qualify for a 1031 exchange. It has to be an arm’s length transaction (i.e. you can’t sell to yourself). Additionally, their are special regs if its an intra-family transfer

I was talking about selling property 1 to someone else and reinvesting the money back into a property I already own (property 2). I’m not sure if that’s how you read it.

That’s right.


To keep a 1031 (delayed) exchange fully tax deferred, the proceeds from the sale of the relinquished property must be used to PURCHASE a replacement property of equal or greater value.

In your example, you want to use the proceeds to pay personal debt. You can do this, but this will make that money taxable in the manner it would have been without the exchange.

keep in mind that cash received is not the same as taxable income. it is possible to receive a lot of cash on a transaction that doesn’t have much taxable income in it.

Thanks for all the responses, learning a lot here.

Please elaborate. I understand how some of the transaction can be shown as previous expenses, but I take your post to mean that most of the transaction can be shown to not have taxable income.


Mark is not rigging the deal, he is not “showing” phantom expenses to reduce capital gain.

I suspect that Mark is just pointing out that not all the equity you may have in an investment property is necessarily taxable capital gain. Let’s say I buy a $1 million property with no financing. I own it free and clear. A little more than a year later, I decide I want another investment property instead. The value of my free and clear property is now $1.05 million.

Under the rules of a 1031 exchange, all of my equity must be applied to the replacement property purchase. In my case my equity is $1.05 million minus whatever I will pay in selling costs. Of this amount, only $50K minus selling costs is my taxable profit due to appreciation.

In this example, a 1031 exchange will defer the capital gains tax on a very small amount relative to the size of the transaction.

or you can pay $12k in taxes, and walk away with $1.038 million cash in your pocket.

point is, the 1031 is only deferring the tax on the INCOME, which may be different from the CASH you receive in the deal.

and you need to know the difference to make an informed decision.