Is a 1031 Exchange the Right Choice for Me?
These are the two major rules that apply to 1031 Exchanges according to the IRS:
1. The total amount of the purchase price for the replacement property must be at least “equal to or greater than” the total price of the relinquished property.
2. Any equity from the sale of the relinquished property must be used solely for the purpose of acquiring the replacement property, otherwise the remaining balanced will be taxed.
If either one of these two rules are violated, then the property owner will become liable for a portion of additional income taxes. There will always be an additional tax levied against the property owner in all cases where the replacement property price is less than the price of the relinquished property.
In cases where only a portion of the equity is used to purchase the replacement property, there will also be an additional penalty tax based on the percentage used. However, partial exchanges can still qualify as a 1031 Exchange. They simply result in a partial deferral of the capital gains.
Here is more information about 1031 Exchanges.