A CPA's Veiw On 1031 Is This Right?
A CPA told me that if I buy RE for 70k and sell for 100k my capital gains are 30k. Fine.
Then he said if I do a 1031 I only need to buy another prop. for at least 70k. and I can finance all of that If I want. Then the 30k goes into my pocket tax free. It doesn't need to be used in the purchase of prop. #2. Does this sound right? Anyone have experience here?
Josh
[addsig]
Not quite right. The price of prop. #2 must exceed the sales price of prop. #1-- in your example $100,000.
If, however you purchased property #2 for $100K and then financed it for $95,000 then the extra cash is tax free.
The CPA is completely wrong. You must follow two general rules when structuring a 1031 exchange transaction. First, the value of your replacement property must be equal to or greater than the value of your relinquished property. Second, you must reinvest all of your net cash proceeds. You can NOT pull any cash out of the deal or you will create taxable boot. In your example, you must acquire a property worth at least $100K. You can always refinance and pull cash out of the property AFTER you have acquired your replacement property, but not just before and not during the 1031 exchange transaction.
[addsig]