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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I would like to purchase 1031 exchange. But need to

Customer Question

I would like to purchase for a 1031 exchange. But need to understand what's feasible. I'm selling a property (relinquish property) for about $310K and would like to purchase another one for $320K. My understanding is that 1031 would allow me to defer my gains and purchase the new one. What I also like to know is if I have to roll over the full amount or can I take some money out and refinance the rest..ie. but $150K down payment and mortgage $170K. I want house the $170K as a downpayment towards the purchase of another property. Or do I have to note all 3 properties in one transaction/exchange process? If all 3 has to be together, then how is the capital gain from the relinquish property allocated? 50/50 or base on purchase value?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

When you plan section 1031 exchange - please be aware that ONLY business or investment property qualify for the exchange.
If that is your personal property it doesn't qualify

but if that a rental property - you may use section 1031 exchange and defer (not avoid!) the gain.

The issue is that for full deferral - you should not receive ANY proceeds from the sale.
If you do receive (or consider as receive) some proceeds - you woudl defer a partial gain not a full gain.
For instance if the original property is sold for $310k and all proceeds are used to purchase another replacement property - you will defer the full gain.

However - if $155k are used to purchase a replacement property but $155k are paid to you - you woudl only defect 50% of the gain.

That also might be beneficial as you will spread taxable income over several years - and that might help to keep your income in lower tax brackets.

Thus - you definitely may plan to recognize a part of the gain.

Customer: replied 11 months ago.
HI Lev, these are investment properties. I want to purchase 2 properties in exchanged for the relinquished one. I was just thinking that since the value of the one is greater than the sell price of my relinquish, I wouldn't have to tie the 2nd property of interests with the exchange. I will using all the money for down payment..just hoping not to tie both. Also, after a purchase with a 1031 exchange, how long must I hold the property before I can sell or exchange it for something else? Does it follow the same rule of long term vs short term capital gain for tax...my house (relinquish property) - $310K
1st property of interest $320K
2nd property of interest $280Khow would the 1031 exchange be structured or distributed for tax purpose?
If I find another property better than the 2nd house later (lets say 6 months) what do I do? Or if I just sell as is without another exchange.. how will I be taxed?
Expert:  Lev replied 11 months ago.

As long as these are investment properties - I see no issues.
You may have two replacement properties - that is OK.

Or you may use ONE replacement property - and have another purchase unrelated to section 1031.

That is your choice.

There is no time limit to sell the replacement property - you may sell it as soon as you wish - but will recognize deferred gain unless you will be using another section 1031 transaction.

After section 1031 completed - you will report it on your tax return - and will calculate (1) deferred gain and (2) basis of the replacement property.

It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations.

Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange.

The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction.

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

Same rules apply to determine long or short term gain.

Expert:  Lev replied 11 months ago.

Considering your example
house (relinquish property) - selling price - $310K basis $200k and accumulated depreciation $50k
Thus you may replace it by purchasing a replacement property for 320K.
That will fully defer your gain - based on assumptions above $310K MINUS ($200k - $50k) = $160 that would be long term capital gain.
You woudl need to determine the basis on the replacement property - $160 PLUS ($320k - $310k) = $170k.
In this case - the second property you purchase woudl not be a part of section 1031 transaction.

But if you want to use the second property - the tax treatment will be difference and only a part of the gain woudl be deferred.