Example of a 1031 Tax-Deferred Exchange

EXAMPLE: Doing a 1031 exchange from one investment property into another. What do the steps look like? What's off-limits during a 1031 exchange? If you had bought a property for 500k, what do you have to exchange into?

Chase Leavitt: Can we talk about the numbers just a little bit, let's do an example. Cause I think there are some misconceptions out there on the amount of what people need to exchange that I get asked on every now and again. So let's say investor, Bob comes to you and says, Hey, I sold my duplex for 500,000 and had bought it for 300,000. 

So I ended up making 200,000, right?

How much would investor Bob need to exchange? Because oftentimes they have that investor that they'll come to me and say, okay, I need to exchange 200,000. Is it the 200,000 that the 300,000 that he owed on it? Is it the 500,000?

Let's just talk about that real quick. 

Sherida Zenger: So my understanding is it's whatever you sold the property (500k) less title fees and commissions is what he would have to replace.

There is a big misconception because people say, "oh, it's only on my gain." It's not. It's what you actually sold the property for; you have to then replace that value. 

Chase Leavitt: Let's say commissions, let's say he ends up 475k. You're telling me he needs to find another property for 475k or more. Correct. And it's easy when the property is already built. Right. Cause you know what you're going to purchase that property for. So I think is what we've been talking about here is the new construction. 

And figuring out what the costs are. So basically that is what you need to do. You can 1031 exchange into new construction. We went over this what five, 10 minutes ago, just find out what the land value is and that construction value, and it needs to equal for investor Bob, at least the 4 75. At the time of his hundred and 80-day mark  

Sherida Zenger: He could split it into two. 

So sometimes we'll say to an investor, Hey, you may want to buy two fourplexes because we can tie that value upright on that first draw loan with the land value. 

Steve Olson: As long as you get to that overall exchange amount that needs to be achieved.  

Sherida Zenger: And here's another thing when you're, identifying a property. 

You have to identify, you can identify up to three properties, right? Yeah. If you identify four, you have to buy. If you identify three, you can buy one, two, or three.  

Steve Olson: Because you have to identify within 45 days of your exit and that's there so that people don't say, "and I identify the whole world." 

If you do that, you can't prove you're in good faith trying to do a 1031 exchange...

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