Many clients have blinders on when thinking about doing a 1031 exchange. They may think “I’ve got $500,000 of net proceeds, all I have to do is redeploy my $500,000.” These clients are not thinking about the fact that they also need to exchange into a property of equal or greater value. For example, you may have $500,000 in proceeds, but your relinquished property may be worth $2 million. That means you have to buy a $2 million or greater replacement property in order to continue your investment into an equivalent property. So it’s not just redeploying the cash. It’s redeploying the cash into enough replacement property.
Furthermore, to the extent that you paid off debt or mortgages on your relinquished properties, you have to offset that debt relief on the purchase of the replacement property by either taking out new debt or adding cash out of your own pocket. Think about it as going up in value, reinvesting all of your equity, and offsetting your debt relief. If you do those three things, you 1031 exchange is generally going to be OK.
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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