Let’s say original property was 1M with 500k mortgage. New property 1.3M with 800k mortgage. All sales proceeds were used to purchase more expensive property. Is anything taxed? Is the increased mortgage taxable?
Thank you for your question! In the scenario you described, the Exchangor is going across or up in value, equity and debt, so all capital gains tax would be deferred. The increase in mortgage is NOT taxable.
Hello, thanks for the excellent video! I am selling a commercial building for 3 million. Outstanding balance on loan is 1 million. Original purchase price was 2 million. I’m looking at a replacement property at 1.245 million and would like to be debt free, so no new mortgage. Can you break down my tax liability? Will there be mortgage boot or debt relief if I pay for the replacement property in full using a 1031 exchange? Any thoughts if this is worth doing an exchange or should I consider just cashing out and buying the replacement property with after tax dollars? Any direction you can provide would be greatly appreciated!
Damon, the 1031 Exchange is not all or nothing. Think of the Exchange from the perspective that every dollar spent on the Replacement in excess of the Relinquished Property’s Tax Basis represents deferred gain and therefore deferred tax. To be totally tax-deferred the Exchangor must go across or up in Value and Equity. The Value and Equity numbers are net of closing costs such as Broker’s Commission, Title/Escrow Fee’s, our fee, Tax/legal fees and property tax prorations. If the numbers don’t quite cover, you simply have tax exposure on the difference. Here’s a short video on the topic from our RUclips channel: ruclips.net/video/tm6__V8KY18/видео.html So, using your numbers relinquishing a property for $3m and acquiring a Replacement of $1.245 you would have tax exposure on the difference between the $3M(net of closing costs) while the only gain receiving tax deferral is difference between the Basis and the $1.245. So, if the Basis on the Relinquished Property was $800k and you bought at the $1.245 you would defer the gain the $445k($1.245M-$800k). The tax exposure would be Federal at 20% on Appreciation and 25% on Depreciation Recapture, State Tax on top and finally 3.8% Healthcare tax. These rates are assuming long-term “held for investment” rates… I encourage a call to our office for a more detailed discussion of your situation!
so i added a new roof and painted the apt and now wanting to pay the contractor at closing... it is a boot... in order to avoid paying taxes on this boot , I would need to get another loan from a bank once the 1031 is completed can closed
If you are taking advantage of the 1031 Exchange for tax-deferral, the money you put into the property for repairs prior to selling will be considered equity in the property. You are correct that any invoices paid at closing for work done will be taxable as Boot. After the exchange is completed, you can apply for a cash-out refinance on the new replacement property to help replenish the funds. Always talk with your tax advisor as to how long you should own the property prior to applying for the loan!
hey! great explanation by the way. so, in an exchange, my new property doesn't equal the value of the relinquished property. however, my new property costs more than my net profit from the relinquished property. how does the irs view this? hopefully my question makes sense. thank you!!
Thank you for watching! And good question. Profit or gain really has nothing to do with what has to be spent in an Exchange. It just tells us when an Exchange ceases to make sense. In order to be totally tax deferred, one must meet what we call "The napkin test" which simply states you must go across or up in value and equity. Both numbers are net of closing cost, not the gross to be totally deferred! Another way to look at it is every dollar spent overt your basis, represents tax-deferred gain.
Thank you. If the net proceeds of the sale are going toward an acquisition that will require a bridge loan, if I keep some money aside in the exchange for paying the origination fees and points at closing, does that count toward the 100% deployment of the funds or could I be taxed on that?
Nope! Typically origination fees and points would be considered boot and therefore are taxable. If you'd like more info on closing costs and their treatment please reach out and we will provide guidance.
Hey from California here. Let's say we keep a boot of 10k and re-invest the remaining money as a downpayment. This means the capital gains tax will only be applied to the 10k boot that we kept right?
Hello Mike! If you sell your relinquished property for $203,000 and acquire new property for $90,000 in a 1031 exchange, you would have approximately $113,000 in “boot” which would be taxable. The amount of the loan is irrelevant in this calculation. To determine if a 1031 exchange is worth doing, you will need to know the amount of your gain that you will owe capital gains taxes on if you were to sell without doing an exchange. You can use this calculator to estimate but it is always best to consult your tax professional: Capital Gains Calculator www.1031exchange.com/calculators/ If your gain is similar to or less than the $113,000 of taxable boot in the above scenario, it would not be worth doing a 1031 exchange.
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Let’s say original property was 1M with 500k mortgage. New property 1.3M with 800k mortgage. All sales proceeds were used to purchase more expensive property. Is anything taxed? Is the increased mortgage taxable?
Thank you for your question! In the scenario you described, the Exchangor is going across or up in value, equity and debt, so all capital gains tax would be deferred. The increase in mortgage is NOT taxable.
Hello, thanks for the excellent video! I am selling a commercial building for 3 million. Outstanding balance on loan is 1 million. Original purchase price was 2 million. I’m looking at a replacement property at 1.245 million and would like to be debt free, so no new mortgage. Can you break down my tax liability? Will there be mortgage boot or debt relief if I pay for the replacement property in full using a 1031 exchange? Any thoughts if this is worth doing an exchange or should I consider just cashing out and buying the replacement property with after tax dollars? Any direction you can provide would be greatly appreciated!
Damon, the 1031 Exchange is not all or nothing. Think of the Exchange from the perspective that every dollar spent on the Replacement in excess of the Relinquished Property’s Tax Basis represents deferred gain and therefore deferred tax. To be totally tax-deferred the Exchangor must go across or up in Value and Equity. The Value and Equity numbers are net of closing costs such as Broker’s Commission, Title/Escrow Fee’s, our fee, Tax/legal fees and property tax prorations. If the numbers don’t quite cover, you simply have tax exposure on the difference. Here’s a short video on the topic from our RUclips channel: ruclips.net/video/tm6__V8KY18/видео.html
So, using your numbers relinquishing a property for $3m and acquiring a Replacement of $1.245 you would have tax exposure on the difference between the $3M(net of closing costs) while the only gain receiving tax deferral is difference between the Basis and the $1.245. So, if the Basis on the Relinquished Property was $800k and you bought at the $1.245 you would defer the gain the $445k($1.245M-$800k). The tax exposure would be Federal at 20% on Appreciation and 25% on Depreciation Recapture, State Tax on top and finally 3.8% Healthcare tax. These rates are assuming long-term “held for investment” rates…
I encourage a call to our office for a more detailed discussion of your situation!
Thank you for the clear explanations.
You are welcome!
so i added a new roof and painted the apt and now wanting to pay the contractor at closing... it is a boot... in order to avoid paying taxes on this boot , I would need to get another loan from a bank once the 1031 is completed can closed
If you are taking advantage of the 1031 Exchange for tax-deferral, the money you put into the property for repairs prior to selling will be considered equity in the property. You are correct that any invoices paid at closing for work done will be taxable as Boot. After the exchange is completed, you can apply for a cash-out refinance on the new replacement property to help replenish the funds. Always talk with your tax advisor as to how long you should own the property prior to applying for the loan!
So additional cash could be a loan from the bank, and I put 30% down on my new like property?
hey! great explanation by the way. so, in an exchange, my new property doesn't equal the value of the relinquished property. however, my new property costs more than my net profit from the relinquished property. how does the irs view this? hopefully my question makes sense. thank you!!
Thank you for watching! And good question. Profit or gain really has nothing to do with what has to be spent in an Exchange. It just tells us when an Exchange ceases to make sense. In order to be totally tax deferred, one must meet what we call "The napkin test" which simply states you must go across or up in value and equity. Both numbers are net of closing cost, not the gross to be totally deferred! Another way to look at it is every dollar spent overt your basis, represents tax-deferred gain.
@@1031ExchangeExperts thanks for the quick response!!
Thank you. If the net proceeds of the sale are going toward an acquisition that will require a bridge loan, if I keep some money aside in the exchange for paying the origination fees and points at closing, does that count toward the 100% deployment of the funds or could I be taxed on that?
Nope! Typically origination fees and points would be considered boot and therefore are taxable. If you'd like more info on closing costs and their treatment please reach out and we will provide guidance.
Hey from California here. Let's say we keep a boot of 10k and re-invest the remaining money as a downpayment. This means the capital gains tax will only be applied to the 10k boot that we kept right?
As long as you meet the value and equity requirements net of the 10k boot, the answer is yes.
Im selling a rental for $203,000. Original loan was $87000. The new property would be $90,000. Is it still worth doing a 1031 exchange?
Hello Mike! If you sell your relinquished property for $203,000 and acquire new property for $90,000 in a 1031 exchange, you would have approximately $113,000 in “boot” which would be taxable. The amount of the loan is irrelevant in this calculation. To determine if a 1031 exchange is worth doing, you will need to know the amount of your gain that you will owe capital gains taxes on if you were to sell without doing an exchange. You can use this calculator to estimate but it is always best to consult your tax professional:
Capital Gains Calculator
www.1031exchange.com/calculators/
If your gain is similar to or less than the $113,000 of taxable boot in the above scenario, it would not be worth doing a 1031 exchange.
My base price after depreciation cost would be around $60,000. So my gain would be $143,000 without doing the 1031 exchange.
thank youuuuu!
Thank you for tuning in!