Equity

Equity refers to the amount of ownership that an investor has in a property, calculated as the property's fair market value minus any outstanding mortgages or other liens.

During a 1031 exchange, an investor can sell a property and defer paying taxes on the capital gains if they use the proceeds to purchase another like-kind property. The equity from the original property can then be transferred to the replacement property.

For example, if an investor owns a property worth $1 million and has a mortgage of $500,000, their equity in the property is $500,000. If they sell this property for $1.5 million and use the proceeds to purchase another like-kind property for $1.5 million or more, they can defer paying taxes on the capital gains. The equity from the original property ($1 million minus the $500,000 mortgage) can then be transferred to the replacement property.