Many people who are looking into doing a 1031 exchange don’t really know how much they need to buy and reinvest in order to defer all of their gains. This article will walk through the basics of performing a successful 1031 exchange.
If you think about it as needing to continue your investment into a like-kind property of equal or greater VALUE and EQUITY, you’ll see that you need to buy a replacement property of roughly equal or more than what you sold your relinquished property for. You are able to net off certain transactional expenses like a realtor commissions, closing costs, etc., but if you want a rough rule of thumb, look at buying a replacement property at a higher price. Many tax problems can be solved by buying a more expensive replacement property.
Cash can Burn you with Taxes
The next element to look at is you don’t want to have any net proceeds go into your pocket. That cash would burn you with taxes. Remember to redeploy all of that cash (from the sale of your relinquished property) into your new replacement property.
The last element to think about is debt relief. Any mortgages, liens, deeds of trust that you pay off on the sale of your old property need to be offset by either new debt or cash out of pocket. To summarize, buy a replacement property of greater value, reinvest all of your net proceeds, and offset any debt relief with new debt or additional cash. If you satisfy these rules of thumb, you’ll likely have an effective 1031 exchange.