1031 Exchange - Matching Debt on Partial Disposition
I purchased a property with 3 buildings in a single transaction, which are all under a single loan. I'm currently under contract to sell off one of the buildings. Per the terms of the loan, 90% of sales proceeds must go towards paying down debt. What are the parameters that I need to achieve in a 1031 exchange?

For example, the purchase price is $3m with a $1.5m loan. The cost basis per building is $1m, which consists of $0.5m in debt and $0.5m in equity. At a sales price of $1.5m, I need to convey $1.35m (90% * $1.5m) to paying down the loan, and I receive $0.15m in net proceeds. When I go to 1031 exchange this, I know I need to find a property that is $1.5m to match the sales price, and I know I have to invest all $0.15m in cash proceeds. How much debt do I need to match? Is it the $0.5m on the building or the $1.35m of debt that was retired?

If I do not exchange, what are my profits for tax calculations? I am pretty sure I would need to report $0.5m ($1.5m - $1m) in gains even though I walked away with barely enough to cover the taxes.
[{"id": "ia7iqe2", "text": "I think I found my [answer](https://www.ipx1031.com/replacing-debt-in-a-1031-exchange/). I need to match the $1.5m in value and all the cash ($0.15m), but I can make up the remaining value with a mixture of cash and debt. \n\nJust want to confirm this as you can't believe everything you read on the internet.", "replies": [], "depth": 1}, {"id": "ia7mdv1", "text": "The link you posted is correct, but you\u2019re miscalculating your equity. Your debt on the individual building is $500,000 ($1.5MM / 3). You\u2019re selling it for $1.5MM. That means you have $1MM equity, not $0.15.\n\nThat being said you should talk to a tax atty and/or a good accountant to see what can get with allocating here (does not need to be split evenly between buildings, but needs to be justifiable), but you will not be able to say you had a $1.35MM loan on a property with a $1MM basis. \n\nI\u2019m not sure how exactly your loan agreement works, but it does sound like they\u2019re telling you to pull money out of one sale and put it into what is now a separate project, and that will have tax liability. The other question here is that if you\u2019re paying down 90% of the original balance of the loan, your loan balance on two properties worth ostensibly $3MM together would be &lt;$150k\u2026 Seems like they would be willing to work with you to restructure that.", "replies": [{"id": "ia7vyon", "text": "Thanks, appreciate the insight. I exaggerated the numbers a bit to make them round, but the idea is the same. I\u2019m basically trying to partially roll out of a property and into another project. I\u2019m trying to avoid the tax liability by doing it through a 1031 exchange. \n\nI would love to restructure the loan. After the sale closes, there will finally be a comp in the area, which will change the FMV of the remaining buildings, I believe. Unfortunately a restructure would probably be at the new rates(?) which is substantially higher than my current note. Do banks do anything somewhere in between?", "replies": [{"id": "ia8eiyo", "text": "You\u2019re correct on the rates if you were to get a new loan, which is why I\u2019d strongly recommend going to your current lender and trying to negotiate with them. Do they know you\u2019re under contract right now and do you have any potential outs?\n\nIt\u2019s in their best interest that you make this sale and payoff as much of the loan as possible so that they can lend the money at a higher rate elsewhere (if for whatever reason they don\u2019t view it this way, then I\u2019m sure you can negotiate out paying 90% of proceeds toward the loan). You should go to them and say, \u2018I have a great offer in hand, it\u2019s mutually beneficial if this is sold, but under the current terms I would need to bring in $850k of outside equity to fully defer the taxes and if I don\u2019t do an exchange my tax liability will be greater than my cash out. Let\u2019s discuss how we can make this work.\u2019 From there, if they\u2019re at all reasonable they will work with you and throw out some options. Obviously, if you\u2019re tied to the current contract and they know, you don\u2019t have real leverage, but probably still worth bringing it up.\n\nAs for the depreciation question, I believe it\u2019s applied to your ordinary income first then if that goes down to zero it will then apply to the cap gains. I\u2019m fairly confident on that, but would definitely confirm w/ an accountant before making a decision based on that info.", "replies": [], "depth": 3}, {"id": "ia8r8aa", "text": "You likely have allocated loan amounts per building. Check your loan docs.", "replies": [{"id": "iaa3vcw", "text": "We do not. There is only one mortgage amount on the entire property even though each parcel is specified individually.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ia7wznt", "text": "My other question is whether I can use depreciation losses from the other 2 buildings to offset the capital gains on the one being sold? I will have a lower cost basis if I dispose of the other 2 buildings in the future, but at least I can push off the problem of fulfilling a 1031 exchange for now?", "replies": [], "depth": 2}], "depth": 1}]