When engaging in a 1031 exchange, the primary goal is to defer capital gains taxes by reinvesting the proceeds from the sale of your relinquished property into a like-kind replacement property. To achieve full tax deferral, you need to adhere to specific reinvestment guidelines. Here’s a detailed breakdown of what you need to consider:

1. Reinvestment of Net Sale Proceeds: To defer all capital gains taxes, you must reinvest all the net proceeds from the sale of your relinquished property into the replacement property. The net proceeds are the amount you receive after deducting allowable closing costs and any mortgage or debt payoff from the sale price.
2. Replacement Property Value: The replacement property must be of equal or greater value than the relinquished property. This means that the purchase price of the new property should be at least equal to the selling price of the old property, minus any allowable closing costs.
3. Debt Replacement: If there was a mortgage or other debt on the relinquished property, you must also replace that debt on the replacement property. This can be done by taking out a new mortgage or by investing additional cash to cover the difference.
4. Avoiding Boot: Any cash or non–like-kind property received in the exchange is considered “boot” and will be subject to capital gains taxes. To avoid boot, ensure that all proceeds are reinvested and that the debt on the replacement property is equal to or greater than the debt on the relinquished property.

Example: Let’s say you sold a rental property for $500,000. After paying off a $100,000 mortgage and $20,000 in closing costs, you have $380,000 in net proceeds. To fully defer taxes, you need to:

• Purchase a replacement property worth at least $500,000.
• Reinvest the entire $380,000 in net proceeds into the new property.
• Ensure that the new property has at least $100,000 in debt, either through a new mortgage or by adding additional cash to cover the difference.

At Deferred.com, we offer qualified intermediary services to facilitate your 1031 exchange. As your qualified intermediary, we ensure that you do not have direct access to the proceeds, which helps maintain the tax-deferred status of your exchange. Our “No Fee Exchange” service can save you money, making the process more cost-effective.

By following these guidelines and using Deferred.com as your qualified intermediary, you can successfully complete a 1031 exchange and defer capital gains taxes, allowing you to reinvest more of your equity into a new investment property.