Can I complete a 1031 exchange with a portion of my sale proceeds and cash out?
You can still do an exchange to defer a portion of the taxes that would otherwise be due on the sale of your relinquished property. The portion of proceeds which you do not choose to exchange is referred to as “cash boot” and becomes taxable at federal and state levels.
How are mortgages and debt handled?
Generally, if you have a mortgage on your property you must add additional cash to your purchase of replacement property equal to the amount of the mortgage, or take on an equal or greater amount of debt to replace it. If you do not add additional cash or replace your debt it is considered “mortgage boot” and is subject to capital gains taxes. It is possible for you to pay capital gains taxes on the mortgage boot and complete a partial 1031 exchange with the remainder to defer a portion of the capital gains taxes.
What taxes are involved in the sale of real estate?
It is best to consult your tax professional to calculate your individual taxes due. Generally speaking, your capital gain on the sale of real property is fully taxable at both federal and state levels. Typically, your capital gain is calculated by taking your sale price and subtracting your adjusted basis in the property and selling expenses.
- Long-term federal capital gains – Up to 20%
- State taxes – As high as 13% in some states
- Depreciation recapture – 25% of utilized depreciation
- Net investment income tax – 3.8%