The Napkin Test: 1031 Accounting Rules

There are some general guidelines or benchmarks to determine if you will defer all of the gains in a 1031 exchange.  These are general rules of thumb that are almost always right.

The goal is to turn the 1031 exchange funds into an equivalent amount of like-kind property received by the taxpayer within the exchange period.

General Accounting Rules for Deferring all the Gain in a 1031

From an accounting perspective, typically taxpayers will want to acquire replacement property that is “up or equal” in Value (price) and will roll over all of their Equity (net proceeds) from the disposition of their old relinquished property into their new replacement property.

Further, to the extent that taxpayers were relieved of liabilities and debt, such as mortgages on their old relinquished property, the debt relief is offset by:

  1. new liabilities or mortgages taken on in conjunction with the purchase of their new replacement property; OR
  2. by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

Minneapolis Qualified Intermediaries

Contact our 1031 qualified intermediaries today at our Minneapolis office if you are interested in how a 1031 exchange can help save you money - 612.643.1031.