Understanding 1031 Exchange
Property A rental purchased for 200,000 in 2001. Soon to close sale for 500,000.
If I have this right...I must purchase a property/properties for a replacement cost of 500,000. This means I take the 300,000 and find let's say 2(150,000)and 1(200,000) rentals. If I do not reinvest at all capital gains will be due on the 300,000.
What happens if I only use the 300,000 to find 2 properties and pay in full?
Ignoring depreciation and depreciation recapture, let's just say you exchange your $500K property for property with a value of $300K.
You have a $200K cash "boot" from this exchange taxable as a long term capital gain.
Thank you for helping!!! Is this even if the original $200. was a loan?
Yes, even if. For the moment, let's ignore the adjustments in basis from depreciation and capital improvements. Your original $200K purchase price for the relinquished property is the new basis of your replacement property. Since $200K of your profit was not reinvested, it is taxed as a capital gain.
It does not matter in this instance how much of your original purchase price was borrowed money, because you repaid the entire loan from the proceeds of the sale of your relinquished property.
What if I find a rental for 500. put down 100. cash --get a loan for 400. Does that mean I walk away with 200. in cash?[ Edited by ej4050 on Date 04/29/2004 ]
Yes, you walk away with $200K which is taxed as a long term capital gain.
For the exchange to be totally tax deferred, ALL of your exchange proceeds must be reinvested in the replacement property. This means that your downpayment in this example will be $300K and you get a new loan for $200K or bring $200K in new money to the settlement table.
After the exchange is closed, if you want to refinance your new property to take $200K out of your equity, you are free to do so without any tax consequence.
Thanks...I am beginning to understand.
Also went and saw accountant today as the closing is Wed. Have contract on replacement and will be getting some cash out that will be taxable.
Have decided to limit rentals and move into rehab, because that is were my talent is.