Monday, February 16, 2009 at 08:45AM | William L. Exeter Can I Buy Property Worth Less Than What I Sold Property For in my 1031 Exchange?
Trading Down in Value in a 1031 Exchange
The simple answer is yes, absolutely. It's called trading down in value. You can trade down in value, whether on purpose or by accident, by selling one property and acquiring another property of lesser value.
Taxable Boot from Partial 1031 Exchange
The amount or value that you trade down by will be considered boot and will result in taxable gain, but it does not mean that your 1031 tax deferred exchange will be disqualified. It simply means that you have traded down in value and completed a partial 1031 tax deferred exchange. Part of your depreciation and/or capital gain will be taxable and part will be deferred.
The amount of tax that is deferred versus the amount of tax that is taxable should be calculated in advance by your tax advisor to ensure that the 1031 tax deferred exchange would be appropriate and beneficial for you, as it is possible to trade too far down in value so that your 1031 tax deferred exchange would not defer any taxes.
Cost Basis is Not Prorated
Your cost basis is not prorated on partial 1031 tax deferred exchanges. The amount that you trade down by is first applied toward your taxable amounts and only to your cost basis once you have fully paid the taxes due.
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