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What is Equal or Greater?

We receive calls daily from investors curious about Delaware Statutory Trusts (DSTs) and 1031 exchanges. Today we'll talk about an essential requirement to complete a fully tax-deferred exchange.


I am planning to sell an investment property and purchase a new investment property. I want to complete a 1031 exchange to defer the capital gains taxes and have more cash to reinvest. I understand there are strict requirements for the value of my new property. What is equal or greater?


‘Equal or greater’ refers to the amount of exchange funds required to acquire a replacement property in a 1031 exchange. To completely defer taxes owed on capital gains, your replacement property acquisition cost must be equal to or greater than the value of your exchange funds. The value of your exchange funds typically represents the equity, the debt, and any profits earned from the sale of a relinquished investment property.

Many assume ‘equal or greater’ means that the purchase value of the replacement property must be equal to or greater than the sale value of the relinquished property. This, however, is inaccurate. Transaction fees from the sale of a property will reduce the value of the exchange funds, so the purchase price of the replacement property will not have to evenly match the sales price of the relinquished property. Likewise, transaction fees required for the purchase of the replacement property can be paid using exchange funds, also lowering the necessary value of the purchase price.

For example, let’s say you sold a property for $550,000, paying $30,000 in transaction fees. If you had $225,000 equity in the property and $275,000 in remaining debt on the property, you would net about $20,000 in profits. The value of your exchange funds is the total of these amounts, or roughly $520,000. If you’re anticipating about $20,000 in acquisition fees, you should look for a property with a purchase price of around $500,000 to qualify for your exchange as an evenly valued replacement property. Any property priced higher than this that would require a contribution of personal funds would also be eligible for your exchange, qualifying as a greater valued replacement property.

Ensuring that the replacement property value is equal to or greater than the value of your exchange funds will help you prevent incurring taxable boot when you complete your exchange. Cash boot occurs when all of the exchange funds are not used for qualifying acquisition expenses.

Expenses that can be paid using exchange funds include sales commissions, legal fees, escrow fees, inspection fees, title insurance fees, recording fees, document fees, notary fees, and others. Expenses that cannot be paid using exchange fees include utility costs, mortgage points, mortgage insurance, property insurance, HOA dues, property repairs or termite work, and others.

Many investors have found that DSTs help to simplify the exchange process by eliminating the risk of excess exchange funds. Because acquiring beneficial interests in a DST property does not require additional acquisition fees, exchange investors do not have to estimate a portion of their exchange funds for use on acquisition fees. Instead, once exchange funds are calculated, the total can be used in one transaction to purchase interests in the DST.

Bottom line: In a 1031 exchange, you are always allowed to contribute additional funds to acquire a property valued greater than the value of your exchange funds. However, you must acquire a property with an acquisition value at least equal to that of your exchange funds to avoid capital gains taxes.

Learn More About DSTs

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.