1031 Exchange

[Taxizen]

A new client completed 1031 exchange with intermediary escrow company in 2007. He and his lawyer followed the 1031 rules except for two rules: the greater sales price and greater debt rules of the replacement property.

I explained these rules but he and his lawyer insist that the tranaction fall under 1031. It confuses me right now. They think the taxpayer only can pay the taxe on the difference (of what?).

Should the taxpayer follow the 1031 rules exactly to defer the capital gain? If the 1031 exchange fails, does the taxpayer have to pay the capital gain tax on the sale of the property?

Any input would be greatly appreciated.

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[jainen]

>>except for two rules: the greater sales price and greater debt rules<<

Yes, the taxpayer must follow the 1031 rules exactly. But there are no such rules about buying up. 1031 is an enormously flexible technique. You can use it to buy up, buy down, consolidate or diversify investments, change the type of property, even cash out or bring in partners. The worst that will happen is capital gains on the particular part that doesn't qualify. In your case, you may find that there was some cash or mortgage boot received if they didn't roll over 100% of the equity.

Usually a qualified intermediary will make sure the rules are followed concerning things like chain of title and dates. They are not so helpful in matching values of like kind property, so read the paperwork carefully.