Q: My wife and I have a cabin that we sold for $405,000. We wound up with about $135,000 in cash.
We are planning on purchasing another cabin for approximately $315,000. Can we use a 1031 exchange? And, what will be the tax implications for purchasing a home that is of a lesser value?
Thank you for you response.
A: A 1031 tax free exchange requires that you purchase a replacement home for at least the price of the one you sold. You would have to purchase a cabin that costs at least $405,000 or two properties that together would total $405,000. You must also do this within the prescribed time frame.
If you already sold the cabin, you won’t be able to use a 1031 exchange. A 1031 exchange is a provision in the tax code that allows you to defer the payment of taxes on the sale of an investment property, but you have to set up the exchange prior to the sale of your home.
For more details, contact your tax preparer or a real estate attorney who has expertise in this area.