Exchanging into 1031 Properties of Equal or More Value

1031 Property Values

1031 Exchange Question: should you consider exchanging into one or more properties so you have continued investment into properties of equal or more VALUE?

Getting the Most Tax-Efficient Outcome

To get the most tax-efficient outcome, you may want to take on some more debt and buy more than you ordinarily would. One trick is to go into investments with non-recourse debt (that you are not personally liable for) to get to the requisite value, but without the personal liability.

3 Rules of Thumb for 1031

There are three general rules of thumb (also known as the napkin test) 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. A 1031 exchange is not an all or nothing deal, and you can complete a partially tax deferred exchange; but you will probably recognize gain to the extent that you buy down in value.

Check out this video related to the topic:

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 full vs. partial exchanges, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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