Easy Calculation for “Equal or Up....”

To have a tax-free 1031 exchange you have to do two things: 1) you have to reinvest all the cash left over from the sale, and 2) you have to buy equal or up.

Failure to do both of these things will result in a tax liability. It doesn’t toast your exchange—you simply pay tax on the cash you didn’t reinvest. Or you pay tax on the amount of the buy-down.

It’s easy to tell when you’ve reinvested all the cash and have clearly bought up. But if your New Property’s purchase price is CLOSE to the selling price of your Old Property, it isn’t always clear whether or not you bought EQUAL because of closing costs from the sale of the Old Property.

There are two basic types of closing costs: 1) selling costs (such as real estate commissions) which add to your cost (in other words, they reduce your gain), and 2) tax-deductible items (such as property taxes) which are paid at the time of the sale.

To calculate your equal-or-up target, you are supposed to subtract all the selling costs and tax-deductible items from your sales price. You also subtract any cash you pull out of the sale at the time of the closing that you intend to pay tax on. The resulting figure is your equal-or-up target... BUT WAIT!

Before you pull out a calculator, scratch pad and your copy of the settlement statement to add up all these numbers, STOP – there is a very simple way to calculate this number. You simply add two numbers: 1) any mortgage or other debt paid off on the settlement statement, and 2) the cash that came to us, your qualified intermediary, the 1031 Exchange Experts.

Adding just these two numbers is quick and easy and will instantly give you your equal-or-up target. If you're considering doing a 1031 exchange right now, give us a call. We can help you sort out your capital gains tax options.