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Confused about the 1031 exchange in partial defer...

My case is as follows:

  1. I got an investment property in Los Angeles, USA which I plan to sell for 850K.

  2. I got that property 15 yrs ago for 300K. Clearly, there is 550K capital gain here.

  3. But I have only 400K equity here as there is 450K loan left on the property,

From the picture above, unless I do a 1031 exchange, a huge portion of the equity ( almost %50! ) is going to be handed to Uncle Sam -- which I do not want to.

THEREFORE I PLAN TO DO 1031 EXCHANGE. HOWEVER, THIS TIME, I DO NOT WANT ANY LOANS ANYMORE.

SO I WANT TO BUY THE REPLACEMENT PROPERTY NO MORE THAN 400K ( which is the cash-equity I will get from the proceeds of the sale of the original property )

Here is the confusing parts...

Will I be taxed at all? or will I be taxed over 450K gain ( which is the difference between the property being sold ( 850K ) and the property being bought in the exchange ( which is 400K )?

I read that if the total value of the new property being bought is less than the original property's sale price, then the home-owner must be taxed over the difference? But I also read that the homeowner should only be taxed over if he receives cash thru the exchange ( in my case ), I fully invest all the cash ( 400K equity ) in the new property.

I'm completely confused here.

  • 1
    You owe more than the original purchase price. What did you do with the extra loan funds? If you spent it on the house the profits might not be as much as you fear. – mhoran_psprep Sep 1 at 9:45
  • you just scratched an old wound. I drew some serious equity 10 yrs ago and it's all gone in 2009 crises in the market. So I cannot claim that as deduction. – RapidoMundo Sep 1 at 9:47
  • 2nd comment. If you did spend the extra funds on the house those extras might have a different depreciation schedule. You question doesn't mention depreciation. Have you factored the deprecation and recapture into your calculations? – mhoran_psprep Sep 1 at 9:47
  • that even makes the amount of tax owed worse. but there is nothing to do about it. it is what it is. my question is if you sell the prop at 850k (and you have a 450K loan on it) and as replacement property you go buy something at 400K in full cash with 0 loan, how much tax is deferred? Let's leave the depreciation a side as it is no factor here. – RapidoMundo Sep 1 at 10:44

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