1031 Help
Hi, I am selling a rental property for $550,000 and purchasing a replacement rental property for $609,000 plus closing costs. I am hesitant to put all the money into the exchange. I have a lot of credit card debt...$30,000 that I wanted to pay off before applying for mortgage on replacement prop. Also my home mortgage is an interest only and I wanted to pay some of it down say $50,000 . Should I take a boot to cover these expenses or take a second mortgage upon closing on the replacement property? My basis on the relinquished prop. is $337,500. Any advice for this first timer 1031 investor would be greatly appreciated.
First go to www.instantinc.us Real Estate Investing Section and select 1031 Worksheet to calculate your gain.
Partial Tax Free Exchange
Sometimes you may have a PARTIAL TAX-DEFERRED EXCHANGE. This may happen in a number of ways. Such as pocketing some cash from the sale, or receiving "nonlike-kind" property in the exchange. This "non-like-kind" property could be personal property or any other kind of property different from real estate. Another way to have a partial tax-deferred exchange would be for your replacement property to not be equal to or greater than either the VALUE or DEBT of the property you sold. This means that you will pay some income taxes.
Any one of the above situations is known as a "PARTIAL TAX-DEFERRED EXCHANGE" because you have not protected all of your sales proceeds from being taxed. For example, if you sell a $200,000 rental and buy two properties totaling $150,000, you may pay income taxes on the $50,000 difference.
Another example would be if you owned acreage worth $200,000, in which you had $100,000 in DEBT. You decide to sell it!
You then buy a $200,000 duplex using a $50,000 loan (which gives you a $50,000 in equity). This means you went down in debt by $50,000 which is taxable income. Remember, for a totally tax deferred exchange, you must aquire replacement property(s) which are EQUAL to or GREATER in sales price (VALUE) "and" EQUAL to or GREATER in DEBT than the properties being sold.
Items to consider:
Will the boot qualify for capital gains treatment?
Can you exchange the property and take out a second to pay off your debt?
Hope this helps
There are financial and income tax issues here. I would spend an hour or less with your tax advisor for a quick review of the best possible tax strategies in your specific situation.
The income tax consequences from completing a partial tax-deferred exchange are usually pretty expensive. You have to apply any boot first to your depreciation recapture, if any, and then to your capital gain.
It usually works out better both for financial reasons and income tax planning to complete your exchange and then refinance to consolidate your credit card debt. This eliminates your high interest rate - non-deductible - credit card debt and leaves you with cheaper debt that is probably deductible for income tax purposes.
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Quote:It usually works out better both for financial reasons and income tax planning to complete your exchange and then refinance to consolidate your credit card debt. This eliminates your high interest rate - non-deductible - credit card debt and leaves you with cheaper debt that is probably deductible for income tax purposes.
Bill is correct if the refinance is on your primary residence. However, since you are asking about an investment property, you are not allowed to deduct the interest on the amount of the loan you use to pay off credit card debt. Credit card debt is a personal expense, not an investment expense. The interest on your loan is only deductible if the loan proceeds are used for investment purpose.