Debt

How to Offset Depreciation Recapture in a 1031 Exchange

1031 Exchange Recaptured Depreciation

If someone wanted to do a 1031 exchange strictly to offset depreciation recapture, is that allowed? That's our topic for this 1031 education article.

Depreciation Recapture Example

In this example - the person would be selling a property for $250,000 and basically have no excess cash once existing mortgages were paid off.

If the taxpayer did the 1031 exchange and identified/purchased properties of at least $250K or greater within the allowed time (and put $250K or more of mortgages on them) the taxpayer would just be able to carry forward his basis without any tax consequence? The qualified intermediary would sign the huds, but wouldn't really hold or transfer any cash in this scenario. Would this work?

Using 1031 to Recapture Depreciation

The short answer is yes. 1031 works for both gain from appreciation and also deprecation recapture.

The amount of debt they have is not necessarily related to the basis that they have for tax purposes, so even if they have little or no cash proceeds at closing, they may still have a big gain...and need to do a 1031 exchange.

  • Start Your 1031 Exchange: If you have questions about 1031 exchange depreciation recapture, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Paying Down Debt on Property Exchangor Already Owns

paying down debt

Clients sometimes inquire if they can use the balance of their 1031 funds to pay down the mortgage or debt on replacement property that they have already closed on and purchased as part of their 1031.

Can you Pay Down Debt on Already Acquired Property?

This question usually comes up when people have identified multiple Replacement Properties because they planned to buy a few Replacement Properties, and they have now expended some (but not all) of their 1031 funds on the purchase of the first Replacement Property, only to discover that the remaining Replacement Property(ies) are not suitable or cannot be closed on within the 180 day exchange period.

This prompts the following question: can you go back and pay-down the debt on the already acquired Replacement Property in order to get all of your 1031 funds used-up as part of the 1031 exchange?

Many tax commentators and attorneys think this will not work, and the extra money applied to the debt pay-down will be treated as taxable boot by the IRS.  This is because the IRS takes the position that paying down debt on property that is already owned by a taxpayer is not an exchange...even if it is done within the 180 day exchange period.  The idea is that the exchange on the already acquired Replacement Property is completed and done. 

  • Start Your Exchange: If you have questions about paying down debt on Minnesota property that you already own, reverse exchanges or planning for 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved