In a 1031 exchange, the taxpayer needs to redeploy (or reinvest) all of their proceeds or exchange funds into the replacement property. However, if they have two large of a mortgage or deed of trust on their replacement property, the net result may be that they are receiving funds back at the replacement property closing. Here are some tips to keep in mind if you find yourself in this situation.
Avoiding Taxable Boot
If the taxpayer receives back money from the closing of the replacement property, these funds may be treated as taxable boot by the IRS.
In order to avoid receiving access exchange funds back at the closing it may be necessary to lower the amount of debt being taken out in conjunction with the purchase of the property.
Consult Your CPA
It’s always a prudent practice to have your CPA or tax advisor review your settlement or closing statement before completing the purchase of your replacement property to make sure everything is in order and the 1031 exchange goes off without issue.