Understanding Real Estate

Tax-Deferred Exchanges

Sometimes you may have a PARTIAL TAX-DEFERRED EXCHANGE. This may happen in a number of ways. Such as pocketing some cash from the sale, or receiving "nonlike-kind" property in the exchange. This "non-like-kind" property could be personal property or any other kind of property different from real estate. Another way to have a partial tax-deferred exchange would be for your replacement property to not be equal to or greater than either the VALUE or DEBT of the property you sold. This means that you will pay some income taxes.
Any one of the above situations is known as a "PARTIAL TAX-DEFERRED EXCHANGE" because you have not protected all of your sales proceeds from being taxed. For example, if you sell a $200,000 rental and buy two properties totaling $150,000, you may pay income taxes on the $50,000 difference.
Another example would be if you owned acreage worth $200,000, in which you had $100,000 in DEBT. You decide to sell it!
You then buy a $200,000 duplex using a $50,000 loan (which gives you a $50,000 in equity). This means you went down in debt by $50,000 which is taxable income. Remember, for a totally tax deferred exchange, you must aquire replacement property(s) which are EQUAL to or GREATER in sales price (VALUE) "and" EQUAL to or GREATER in DEBT than the properties being sold.