T
he role that
debt plays
in
an exchange is probably
one of the most
misunder-
stood areas of 1031
law. Many people
(including quali-
fied intermediaries,
CPAs, and attor-
neys) believe that
you are required to
have debt on your
New Property in an amount
equal to or greater than
the debt that was paid off
on your Old Property. This
is NOT, In fact, a require-
ment for a 1031 exchange.
The actual requirement is
two fold: you must
buy equal or up, and
you must reinvest all
of the cash. Assume
for example that you
sell a purple duplex
for $100,000 and you
buy a replacement
property for $90,000. You did
not buy equal or up; in fact
you bought down. As a result,
the $10,000 buy-down is tax-
able—yes, the entire $10,000
is taxable, and you do not
apportion any of the original
cost of the duplex to this gain.
Let’s change the example
and assume that you are buy-
ing the replacement property
for $150,000. Since you sold
the duplex for $100,000, you
are now buying UP, so the
equal-or-up rule is not a prob-
lem for you. However, let’s say
that when you sold the duplex,
your intermediary received
the net proceeds of $60,000
(after paying off the mortgage
and closing costs). To pay
for the purchase of your New
Property, you get a mortgage
for $100,000 which means
that you only need $50,000
of the $60,000 the intermedi-
ary is holding. In other words
you have $10,000 cash left
over. You will pay tax on the
$10,000 even though you are
buying up. And, as before, the
entire $10,000 is taxable.
As I’ve said before, if
you buy equal or up and rein-
vest all of the cash, you will
pay no tax on your exchange
and debt plays no part in the
transaction. Going back to
our original example: you
sold the purple duplex for
$100,000 and after paying
off the mortgage and clos-
ing costs, the intermediary
receives $60,000. Now you
are buying a New Property
for $100,000 and you use
the $60,000 the intermediary
is holding. You owe the bal-
ance of $40,000, but it does
not matter how you come up
with it—you could get a new
loan of course, or you could
take $40,000 out of your sav-
ings account, or some com-
bination of the two (say
a $20,000 new loan and
$20,000 from your sav-
ings account). You simply
have to buy equal or up,
and reinvest all the cash.
Equalizing the debt is not
a requirement.
...Many QIs,
CPAs, and
attorneys believe
you have to have
debt... This is,
in fact, NOT a
requirement...
By Gary Gorman
founder, The
1031 Exchange
Expert’s; LLC
Gary Gorman
is the
founder and owner of
1031
Exchange Experts’ LLC
,
an independent national
qualified intermediary. A
retired CPA, Gary is the
author of the best-selling
1031 exchange book:
Exchanging Up!
, and a
contributor to numerous
publications, including
Forbes, The Wall Street
Journal, Bloomberg’s
and
The New York Times
. He’s
also a contributing author
of books by Donald Trump
and
Rich Dad/Poor Dad
author Robert Kiyosaki.
He can be reached at
or nationwide, toll free at
866-694-0204.
c l a r i t y
You’ve met them. The ‘wise men’ who use big, fifty-
cent words to impress you with their ‘knowledge’ (so-
called). A
REAL
wise man once said,
unclear communi-
cation is the result of unclear thinking.
We at the 1031
Experts’ llc agree. We LOVE to see our client’s ‘light
go on.’ We take difficult 1031 concepts and make them
easy for people to understand. We make the compli-
cated simple.
We don’t have to do this; we want to.
Call us!
We want to be your 1031 Qualified Intermediary.
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July 15-August 4, 2015 —
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