you didn't state whether there was a mortgage on the property sold
First, the purchase price of the property or properties you buy must equal or exceed the sale price of the property or properties that you sell. So if you sell a property for $500,000, you’ll need to buy another property for at least that amount.
Second, there’s a debt financing requirement that applies if you have a mortgage on your original property. In a nutshell, you’re required to carry as much debt or more with your replacement property.
Let's put these two together with an example. Imagine that you have a property with a $200,000 mortgage. You sell that property for $500,000. To complete a 1031 exchange, you need to spend more than $500,000 on a replacement property and you must finance at least $200,000 of that amount. if the new mortgage was less than the original mortgage you have taxable boot.
three examples of how this might work.
Example 1: Adding more cash into the purchase
Let’s say you sell a property for $600,000 and that you had a $400,000 mortgage on it at the time of the sale.
You choose to keep your debt level the same but want to buy a property for $800,000. So you add $200,000 out of your own pocket and buy the new property with $400,000 in cash and a $400,000 mortgage. This satisfies both requirements of a 1031 exchange, and you can defer all taxes.
Example 2: Increasing your leverage
One of the most common reasons for a 1031 exchange with an investment property is to increase leverage. This lets you put your money to work in a higher-income property. You increase not only your cash flow but your rate of building equity.
For this example, we’ll say you dispose of one of your investment properties for $600,000 and that you owed $200,000 on your mortgage at the time of the sale.
You have your eye on a property that costs $1.2 million, so you use the $400,000 in cash from the sale and a new $800,000 mortgage to acquire the property. This also satisfies the 1031 exchange requirements and you can defer the taxes on the sale of your property.
Example 3: A partial 1031 exchange
Contrary to popular belief, a 1031 exchange isn’t an all-or-nothing situation. You can do a partial exchange. However, if you buy a property for a lower sale price than your original property sold for, some of the original property’s sale price is taxable. The same is true if you choose to take on less debt with the replacement property.
