Trading Equal or Up in Value in a 1031 Exchange

Reinvest Total Investment Amount
This seems like a relatively straight forward issue, but it can get confusing for many investors. The concept is simple. Congress wants to make sure that investors trade equal or up in value (i.e. they stay fully invested) if they are going to be able to defer the payment of their capital gain taxes.

Most Investors Trade Way Up In Value
The actual required calculation for trading equal or up in value is not generally an issue because most investors are trading significantly up in value. However, some investors are not interested in expanding their real estate holdings, but do want to make sure that they defer all of their income taxes. Other investors are simply misinformed as to what trading equal or up in value means.

It's Not Just Reinvesting Your Equity
First, trading equal or up in value does not mean just reinvesting all of your cash, equity or capital gain in the property. The investor must do that also, but it is based on the net sales price and not just the investor's equity or capital gain in the property.

The two (2) rules are as follows:

1. Trade equal or up in value based upon the net sales price of the relinquished property; and
2. Reinvest 100% of the net cash proceeds from the sale of the relinquished property.

It is technically based on your net sales price, so if you want to cut the reinvestment as close as possible, you can calculate your reinvestment by taking your gross sales price and subtracting your routine closing costs to arrive at your net sales price. The next sales price is the correct amount of value that you must reinvest in your like-kind replacement property.