How much money do you have to reinvest in a Real Estate 1031 Exchange?

To fully defer all capital gains and depreciation recapture taxes from the sale of the Relinquished Property, the taxpayer must reinvest an amount equal to or greater than the sale price of the Relinquished Property into the Replacement Property. Any portion of the proceeds that is not reinvested, known as "boot," will be subject to taxation.

Boot refers to any non-like-kind property that does not qualify for the 1031 Exchange, including items like cash, notes, partnership interests, securities, inventory, or property held primarily for sale rather than investment. There are two types of boot:

• Cash Boot: Cash received during the exchange

• Mortgage Boot: A reduction in debt or mortgage associated with the exchange

Any boot received in a 1031 Exchange is taxable as either depreciation recapture or capital gains, depending on the circumstances.

It’s important to note that any credits shown on the settlement statement that are paid directly to the taxpayer could also result in boot and trigger a taxable event. Improper handling of certain situations during the exchange can lead to these credits. Here are a couple of common scenarios:

• Earnest Money: If the taxpayer pays earnest money out of pocket, they will be credited on the settlement statement. To avoid this, the Qualified Intermediary should ideally pay the earnest money from the exchange funds.

• Credits for Property Taxes, Security Deposits, or Rent Prorations: If these items are credited to the taxpayer on the settlement statement, they will be taxable. To prevent this, the taxpayer can ask the seller to pay these amounts outside of the closing.

  
  

In summary, to avoid any taxable event, the taxpayer must reinvest at least the same amount as the sale price of the Relinquished Property. However, if the taxpayer takes cash out, creating boot, they will be required to pay taxes on that amount.

Its important to let a specialist help you decide how much can be deferred. Contact 1031 Asset Solutions today at 844-401-1031