The typical 1031 Exchange is not Tax Free. It is tax deferred and sometimes there is recognized tax. Is there a simple way to tell whether your gain will be deferred or recognized?
Marvin Starr, a legendary Oakland California attorney, designed what he called the napkin test. He always explained that he wrote it out at lunch one day on a napkin.
He said that you must go up in value and up in mortgage amounts. So you take your property’s value and existing mortgages and compare it to the proposed property. If the value of the new property and the amount of the mortgages on the new property are both higher than your original property, your exchange should be tax deferred.
If either the value or the mortgage totals in the new property are not higher, you have something called “boot” and it is taxable.
1031 Exchanging is not simple. You need legal, accounting, real estate, escrow, title and intermediary counseling. But you should consider all alternatives in today’s market.
Someone could have a rental house with lots of equity. They could exchange the rental for other kinds of property. Since they are happy with the gain on the house, they might go for two houses. You would have a sale on the current house and purchases on the two new houses for a triple header.
Want any more information give me a call. I know some guys.