Is it Enough to Redeploy Only the Net Proceeds in a 1031 Exchange?

Cash Proceeds 1031 Exchange

When people are doing a 1031 exchange they typically want to defer every cent of tax, but they may have their blinders on as far as what they have to do to defer all of those gains. Sometimes they’ll say “look I'm willing to redeploy only my net proceeds into a replacement property - is that sufficient to satisfy a 1031 exchange?”

Continuation of Investment

In a successful 1031 exchange, you need to have a continuation of investment and you have to reinvest your net proceeds from the old property. But you also have to make sure that you're redeploying into a replacement property or properties of equivalent or greater value.

So if I sell a property for 10 million dollars and only redeploy into a $5 million replacement property, the surly IRS agent is going to be wondering where your continuation of investment is.

3 Rules of Thumb

Generally speaking you have to buy replacement properties of equal or greater value. Next we need to redeploy all of our net proceeds into that replacement property. Finally, we need to offset any debt relief by taking our new debt, or paying cash out of pocket. It’s not as simple as just reinvesting your cash proceeds, you have to jump through some hoops to get this valuable tax deferral.

  • 1031 Hotline: If you have questions about redeployment of proceeds in a 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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