In a partial 1031 exchange you’re only deferring gains to the extent that you’re buying replacement value over and above your transferred basis. Let’s say you sold a relinquished property for $2 million but you had a $250,000 remaining basis in the relinquished property. The first thing that happens when you buy a $1 million replacement property is that your $250,000 basis transfers over to the new acquisition, and you only defer gains over and above that transferred basis.
A partial deferral is better than no deferral at all but it’s not optimal. The best course of action to do a full 1031 exchange is to plan things out and make sure you have enough replacement property to defer all of your gains.
Can I Sell a Relinquished Property Worth $2 Million & Acquire a Replacement Property Worth $1 Million?
The answer depends on how low your basis is on your relinquished property. The first thing that happens when you do a 1031 exchange is that your old basis transfers to the new property. You only really start deferring gains to the extent that you buy real estate over and above your transferred basis. So if your basis was zero (you have a $2 million gain and you buy a $1 million replacement property) you’re going to defer half of your potential gain. This is what’s known as a partial 1031 exchange.
There are a few ways to fix that issue. One is to identify multiple replacement properties and close on enough of those properties so that you’re deferring all of your gains. The other is to do a build-to-suit exchange and construct improvements on that property using your exchange funds.
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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