Do You Have to Reinvest All Net Proceeds into Your 1031 Replacement Property?

1031 Exchange Condo

In a 1031 exchange, does the full amount of proceeds have to be invested into the replacement property including the original down payment amount? For example, if you put $45K down, but will profit $100K - does all $100K have to roll into the replacement property or just the $65K profit? 

3 Rules of Thumb to Follow

This is a common 1031 exchange question. In this scenario, you would probably want to re-invest all of the proceeds into the new Replacement Property because the first cash-out is attributed to gain from an accounting perspective.

There are three general rules of thumb to quickly see if you will defer all of the recognition of gain.

  1. Typically, you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}.
  2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.
  3. And to the extent that you were relieved of liabilities and DEBT, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

For more information, check out the video below:

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

  • 1031 Hotline: If you have questions about 1031 exchange accounting rules, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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