Napkin Test - Rolling Two Relinquished Properties into One

1031 Exchange Napkin Test

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

  1. Typically you will acquire replacement property that is “up or equal” in VALUE* (price); {*net of sales commissions and customary transactional expenses} – so more than the sum of the net sales price of ALL of your relinquished properties.

  2. You will roll over all of your EQUITY (net proceeds) from the relinquished properties into your replacement property - so more than the sum of the net sales proceeds of ALL of your relinquished properties.

  3. And to the extent that you were relieved of liabilities and DEBT, such as mortgages on your old relinquished properties, 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.

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 entirely apply to your specific situation.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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