Let’s say I Sell a 500k property, of which 300k is profit, and 100k was principal and 100k a loan payoff.

At sale closing, I send 300k to 1031 intermediary, 100k to bank (loan payoff), and 100k principal back to savings account.

If I go buy a property for 550k (300k from intermediary, 150k from savings (original principle plus extra 50k principal), and 100k from a new mortgage, will I be subject to a taxable event?

I THINK I messed up by receiving the principle directly instead of sending it to the intermediary, thus making it taxible. I THINK the mortgage payoff was correct, and non-taxable. If that assumption is correct, is there anything I can do to correct it now that the disbursements have been made?

  • I am confused by your specifying 100K as original principal. Is the original value of the property 200K? How much depreciation have you claimed over the years? – mhoran_psprep Jun 30 '19 at 18:13
  • Yes - 200k original cost, no depreciation claimed (For the sake of keeping this question simple). – rob Jul 1 '19 at 17:09
  • Timing is crucial. Naming the new property within 45 days, and then finish the closing within 180 days. To quote from the Wikipedia article: "To elect the 1031 recognition, a taxpayer must identify the property for exchange before closing, identify the replacement property within 45 days of closing, and acquire the replacement property within 180 days of closing. A Qualified Intermediary must also be used to facilitate the transaction, by holding all the profits from the sale, and then disbursing those monies at the closing, or sometimes for fees associated with acquiring the new property." – Rich Lysakowski PhD Aug 21 '20 at 3:30
  • To answer your question a little further, "In order to obtain full benefit, the replacement property must be of equal or greater value, and all of the proceeds from the relinquished property must be used to acquire the replacement property." Proceeds refers to net proceeds, net of any loans, fees, or other expenses that must be subtracted from your principal invested (basis) in the property. – Rich Lysakowski PhD Aug 21 '20 at 3:41

Yes. You seem to have made a mistake. From the Wikipedia article Section 1031 Like-Kind Exchanges

The taxpayer cannot receive the proceeds of the sale of the old property; doing so will disqualify the exchange for the portion of the sale proceeds that the taxpayer received. For this reason, exchanges (particularly non-simultaneous changes) are typically structured so that the taxpayer's interest in the relinquished property is assigned to a Qualified Intermediary prior to the close of the sale. In this way, the taxpayer does not have access to or control over the funds when the sale of the old property closes.

In cases like this, one that followed all the rules, save for this one error, I'd talk to a CPA who claims expertise in this area. The IRS may ignore the mistake, and (off the record), simply reporting the exchange via paperwork as if you were unaware of this isn't likely to draw attention. The 'before' and 'after' were done in a way that was proper and would avoid any taxable income.

  • The amount not sent to an intermediary wasn't gain though. – Hart CO Jun 30 '19 at 18:43
  • Re-read first quoted sentence. – JTP - Apologise to Monica Jun 30 '19 at 19:06
  • Disqualify the exchange for the portion of the sales proceeds that the taxpayer received... it's the non-gain portion they received, so what's the downside? – Hart CO Jun 30 '19 at 20:04
  • Do you feel I am mistaken on the definition of “proceeds”? To me, it means all funds must go through the intermediary. I didn’t read there to be any distinction on what came from the sale, it all goes thru intermediary into new asset. – JTP - Apologise to Monica Jun 30 '19 at 20:13
  • If it's about deferring capital gain I didn't see why disqualifying the non-gain portion would be problematic, but I've not sold any of my investment properties yet so not very familiar with 1031's. I see a number of places that suggest all proceeds should go to an intermediary, but not finding much that's providing insight on actual tax consequences when only the gain portion is sent to the intermediary. – Hart CO Jun 30 '19 at 20:26

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