1031 exchange - must the replacement property have same PRICE (or higher) as relinquished property?

[Patrick85]

I have often read examples that say "the replacement property acquired in a 1031 exchange must have the same market value as the relinquished property."  Is this exactly true as an IRS requirement, or just a convenient short-hand?

The reason I ask is that no one mentions the sale costs (commissions, escrow fees, transfer tax, etc.) for relinquishing a property.  For example, one might SELL a property for $500K, pay off the $100K mortgage, and still end up with only $360K (not $400K) in the 1031 exchange account because $40K was consumed by commission, staging, escrow and transfer fees.  In this case, could one purchase a $460K replacement property, spending the entire $360K funds in the 1031 exchange account (without touching a penny) and acquire another $100K mortgage and meet the 1031 requirements of having received no boot and acquiring the same amount of debt?  Or is one required to come up with an additional $40K (or more) in cash to purchase a replacement property that costs $500K or more?

[Anonymous_ · Accepted solution]

This area of 1031 exchanges is complicated and involves reading very obscure and detailed regulations.

Regardless, in order to avoid boot, you generally need to secure replacement property that has the same (or higher) fair market value as that of the relinquished property.

Typical expenses of the transaction reduce realized gain and increase the basis of the replacement property.

[Patrick85]

While I recognize 1031 exchanges can be complex, this doesn't answer my question.  My question is, "Does the IRS textually require that the replacement property have the same or higher purchase price as the sale price of the relinquished property?"  I know it's possible to play it safe by paying the same or higher price for a replacement property as the sale price of the relinquished property.  But will it ALSO fulfill 1031 requirements to (a) spend all of the funds in the 1031 exchange account, not touching any of the proceeds...and (b) acquire at least as much mortgage and the mortgage left behind?    One can fulfill both of these requirements WITHOUT purchasing a replacement of exactly the same price as the previous property was sold for.  The difference is due to the fact that NOT ALL THE PROCEEDS of the sale go into the 1031 exchange account because there are significant sale costs like commission, etc.  So the question is whether meeting both conditions (a) and (b) is sufficient....or is there some place that the IRS code SPECIFICALLY says the replacement property must have the same or higher price (or "market value) as the property sold?  Thanks.

[Anonymous_]

The following is one of the better sites for informational purposes (perhaps the best).

https://www.1031exchange.com/faq

In short, the fair market value of the replacement property does need to be equal to, or greater than, the fair market value of the relinquished property (disregarding costs entirely - some of which may actually be considered boot).

[JillS56]

The three primary 1031 exchange rules to follow are: 

1. Replacement property should be of equal or greater value to the one being sold. 
2. The replacement property must be identified within 45 days. 
3. The replacement property must be purchased within 180 days.