{"id":27290,"date":"2019-07-09T17:13:51","date_gmt":"2019-07-09T21:13:51","guid":{"rendered":"https:\/\/www.affiliated1031.com\/what-taxes-will-be-due-on-1031-exchange\/"},"modified":"2023-06-29T13:42:14","modified_gmt":"2023-06-29T17:42:14","slug":"what-taxes-will-be-due-on-1031-exchange","status":"publish","type":"post","link":"https:\/\/www.affiliated1031.com\/es\/what-taxes-will-be-due-on-1031-exchange\/","title":{"rendered":"What Taxes Will be Due When Replacement Property Cost is Less Than Gains Received?"},"content":{"rendered":"<div  class=\"tatsu-H1WpFXmjO3 tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"0px 0px 25px 0px\"}' data-padding-top='0px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-H1epKXXjOn\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-B1atX7o_3\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-ryOGPQo_2  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-ryOGPQo_2.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}.tatsu-ryOGPQo_2.tatsu-text-block-wrap .tatsu-text-inner *{font-family : \"Roboto\",-apple-system,BlinkMacSystemFont,'Segoe UI',Roboto,Oxygen-Sans,Ubuntu,Cantarell,'Helvetica Neue',sans-serif;text-transform : none;font-size : 17px;}<\/style>\n<table class=\"mcnTextContentContainer\" border=\"0\" width=\"100%\" cellspacing=\"0\" cellpadding=\"0\" align=\"left\">\n<tbody>\n<tr>\n<td class=\"mcnTextContent\" valign=\"top\">It is not only the capital gains tax that the taxpayer will be deferring payment on when transacting a Section 1031 exchange; it\u2019s also the additional <a href=\"https:\/\/www.affiliated1031.com\/the-forgotten-tax-depreciation-recapture-tax-and-1031-exchange\/\">depreciation recapture tax<\/a> on the relinquished property, as well as any State income taxes if any.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div><\/div><div  class=\"tatsu-single-image tatsu-module tatsu-image-lazyload tatsu-Hk89X7sO3  \" ><div class=\"tatsu-single-image-inner \" style=\"width : 1254px;\" ><div class = \"tatsu-single-image-padding-wrap\" style = \"padding-bottom : 66.746411483254%;\" ><\/div><img class = \"tatsu-gradient-border\" alt = \"Image of model of commercial property and an electronic caculator\" title = \"iStock-1180932025\" data-src = \"https:\/\/www.affiliated1031.com\/wp-content\/uploads\/2023\/06\/iStock-1180932025.webp\" src =\"data:image\/png;base64,iVBORw0KGgoAAAANSUhEUgAAAAEAAAABCAQAAAC1HAwCAAAAC0lEQVR42mNkYAAAAAYAAjCB0C8AAAAASUVORK5CYII=\"  \/><\/div><style>.tatsu-Hk89X7sO3 .tatsu-single-image-inner{border-style: solid;max-width: 100%;}.tatsu-Hk89X7sO3.tatsu-single-image{transform: translate3d(0px,0px, 0);}<\/style><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-B1atX7o_3.tatsu-column{width: 100%;}.tatsu-B1atX7o_3.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-B1atX7o_3 > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-B1atX7o_3 > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-B1atX7o_3 > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-B1atX7o_3 > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}@media only screen and (max-width:1377px) {.tatsu-row > .tatsu-B1atX7o_3.tatsu-column{width: 100%;}}@media only screen and (min-width:768px) and (max-width: 1024px) {.tatsu-row > .tatsu-B1atX7o_3.tatsu-column{width: 100%;}}@media only screen and (max-width: 767px) {.tatsu-row > .tatsu-B1atX7o_3.tatsu-column{width: 100%;}}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-H1WpFXmjO3 .tatsu-section-pad{padding: 0px 0px 25px 0px;}.tatsu-H1WpFXmjO3 .tatsu-section-offset-wrap{transform: translateY(-0px);}.tatsu-H1WpFXmjO3 > .tatsu-bottom-divider{z-index: 9999;}.tatsu-H1WpFXmjO3 > .tatsu-top-divider{z-index: 9999;}.tatsu-H1WpFXmjO3 .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div><div  class=\"tatsu-h6utq5il1393aazt tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"15px 0px 0px 0px\"}' data-padding-top='15px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-h6utq5il34c2rhsq\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-h6utq5il4j3rm1dy\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-h6utq5il5ybrqnm3  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-h6utq5il5ybrqnm3.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style>\n<table class=\"templateContainer\" border=\"0\" width=\"100%\" cellspacing=\"0\" cellpadding=\"0\">\n<tbody>\n<tr>\n<td id=\"templateHeader\" valign=\"top\">\n<table class=\"mcnTextBlock\" border=\"0\" width=\"100%\" cellspacing=\"0\" cellpadding=\"0\">\n<tbody class=\"mcnTextBlockOuter\">\n<tr>\n<td class=\"mcnTextBlockInner\" valign=\"top\">\n<table class=\"mcnTextContentContainer\" border=\"0\" width=\"100%\" cellspacing=\"0\" cellpadding=\"0\" align=\"left\">\n<tbody>\n<tr>\n<td class=\"mcnTextContent\" valign=\"top\">\n<h2>3 Rules for Calculating Gains<\/h2>\n<p>The rules are very complex for figuring out the recognized gain but are delineated by three rules when doing a <a href=\"https:\/\/en.wikipedia.org\/wiki\/Internal_Revenue_Code_section_1031\">Section 1031 exchange.<\/a> Let me try to simplify these rules:<\/p>\n<h3>Rule # 1<\/h3>\n<p>In order to totally defer payment of any tax due, <strong>the taxpayer needs to purchase <a href=\"https:\/\/www.affiliated1031.com\/es\/understanding-1031\/\">replacement property<\/a> (or properties) of equal value or more than the sales price of the relinquished property.<\/strong><\/p>\n<h3>Rule # 2<\/h3>\n<p>If the taxpayer purchased replacement property of lesser value than the sales price of the relinquished property, the taxpayer will be taxed on that difference.<\/p>\n<p>If the taxpayer does not use all of the proceeds from the sale of the relinquished property towards the purchase of the replacement property, <strong>the taxpayer could be taxed on the amount of the proceeds not used.<\/strong><\/p>\n<h3>Rule # 3<\/h3>\n<p>The taxpayer\u2019s basis in the replacement property equals the fair market value of the replacement property less the amount of gain deferred by the taxpayer from the exchange.<\/p>\n<h3>EXAMPLE # 1<\/h3>\n<p>The taxpayer originally purchased an investment rental unit for $300,000.00 about 10 years ago. He has signed a contract to sell the apartment building for $500,000. There are no debts on the property.<\/p>\n<p>If this were a simple sale, the Taxpayer would have a paper profit of $200,000 and would have to pay capital gains tax on the $200,000 plus a recapture tax on the depreciation he took on the property over the 10 years he owned the property and any state income taxes, if any.<\/p>\n<p><strong>But in this case, he is transacting a Section 1031 tax-deferred exchange and is purchasing a more expensive replacement property ($600,000).<\/strong><\/p>\n<p>The taxpayer will be using all of the proceeds from the sale of the relinquished property in order to purchase the replacement property. <strong>That results in a complete 1031 tax-deferred exchange, and no tax would be due at this time.<\/strong><\/p>\n<h3>EXAMPLE #2:<\/h3>\n<p>Same example as above, but in this case, the taxpayer decides to obtain a mortgage in the amount of $250,000, as he needs some additional funds in order to close.<\/p>\n<p>He received $500,000 from the sale of the relinquished property but still needs another $100,000 to close on the replacement property ($600,000).<\/p>\n<p>He borrows $250,000 at the time of closing on the replacement property. Leaving him with an extra $150,000 in his pocket ($500,000 (sales proceeds) + $250,000 (new loan), less the $600,000 (replacement property) = extra $ 150,000).<\/p>\n<p><strong>He will be taxed on the $150,000, with the remaining sums of money qualifying for a Section 1031 exchange.<\/strong><\/p>\n<p>As you can see from the two examples, there can be different results depending on the specific factual patterns.<\/p>\n<p>One final comment,<a href=\"https:\/\/www.affiliated1031.com\/es\/what-expenses-are-deductible-in-a-1031-exchange\/\"> certain expenses are allowed to be deducted from the sales proceeds<\/a> (customary costs of closing such as exchanger\u2019s attorney\u2019s fees, transfer fees on the deed, real estate commissions, and title search fees, etc.). These extra deductions will allow the taxpayer to purchase a replacement property of lesser value as a result of these deductions. It is always recommended that the taxpayer discuss their factual pattern with their tax advisor and Qualified Intermediary prior to the signing of contracts to sell and\/or purchase.<\/p>\n<p>Affiliated 1031 always recommends that taxpayers consult with their tax and\/or legal counsel on all matters dealing with the Internal Revenue Service.<\/p>\n<p>For more information on Section 1031 issues, go to our website: <a href=\"https:\/\/affiliated1031.com\/\" target=\"_blank\" rel=\"noopener noreferrer\">www.affiliated1031.com<\/a> \u00a0and visit our<a href=\"https:\/\/www.affiliated1031.com\/es\/understanding-1031\/\"> Understanding 1031 section.<\/a><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/td>\n<\/tr>\n<tr>\n<td id=\"templateBody\" valign=\"top\">\u00a0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>\u00a0<\/p>\n<\/div><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-h6utq5il4j3rm1dy.tatsu-column{width: 100%;}.tatsu-h6utq5il4j3rm1dy.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-h6utq5il4j3rm1dy > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-h6utq5il4j3rm1dy > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6utq5il4j3rm1dy > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-h6utq5il4j3rm1dy > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-h6utq5il1393aazt .tatsu-section-pad{padding: 15px 0px 0px 0px;}.tatsu-h6utq5il1393aazt > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6utq5il1393aazt > .tatsu-top-divider{z-index: 9999;}.tatsu-h6utq5il1393aazt .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div>\n","protected":false},"excerpt":{"rendered":"<p>First, it is not only the capital gains tax that the taxpayer will be deferring payment on, when transacting a Section 1031 exchange, it\u2019s also the additional depreciation recapture tax on the relinquished property, as well as any State income taxes if any.<\/p>\n<div><a href=\"https:\/\/www.affiliated1031.com\/es\/what-taxes-will-be-due-on-1031-exchange\/\" class=\"exp-read-more exp-read-more-underlined\">Read More<\/a><\/div>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","footnotes":""},"categories":[57],"tags":[],"class_list":["post-27290","post","type-post","status-publish","format-standard","hentry","category-1031-exchange-basics-es"],"_links":{"self":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27290","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/comments?post=27290"}],"version-history":[{"count":9,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27290\/revisions"}],"predecessor-version":[{"id":28116,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27290\/revisions\/28116"}],"wp:attachment":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media?parent=27290"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/categories?post=27290"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/tags?post=27290"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}