What is a 1031 exchange?

Mechanics of an Exchange:

The exchange must meet three requirements to fully defer all capital gains taxes:

1.Reinvest all net proceeds into the replacement property.
2.Obtain an equal or greater amount of new debt on the replacement property or add equivalent cash to offset the debt difference.
3.Title to the replacement property must vest in the same manner as how the relinquished (sold) property was conveyed.

Example 1:

Sales Price $400,000 Replacement Property $700,000
Minus Debt ($150,000) New Debt $480,000
Minus Cost ($30,000)
¬---------------------------- --------------------------------
Net Proceeds $220,000 Down Payment $220,000

Example 2:

Sales Price $400,000 Replacement Property $340,000
Minus Debt ($150,000) New Debt $140,000
Minus Costs ($30,000)
------------------------- -------------------------------
Net Proceeds $220,000 Down Payment $200,000

*Since there is an excess of exchange proceeds of $20K and a debt difference of $10K the sum total of $30K is considered ‘boot’ which is taxable. In this example, there will be a 3 1/3% withholding on the cash boot of $20K in the property is located in California.

info taken from www.exchangeresources.net