Partial 1031 Exchange Services
Need some cash while preserving tax benefits? A partial exchange lets you take money out for immediate needs while deferring taxes on the reinvested portion.
Why Consider a Partial Exchange?
Access Needed Cash
Take out funds for personal needs, business opportunities, or diversification while still enjoying significant tax deferral on the reinvested portion.
Strategic Flexibility
Balance your portfolio by taking profits from appreciated property while maintaining real estate investments and deferring most taxes.
Risk Management
Reduce concentration risk by taking some chips off the table while keeping most of your equity working in tax-advantaged real estate.
How Partial Exchanges Work
Understanding "Boot"
In 1031 exchange terminology, "boot" is any value received that's not like-kind property. This includes cash, debt reduction, or personal property. Boot is taxable in the year received, but you still defer taxes on the reinvested portion.
Types of Boot
- Cash Boot: Any cash received at closing or not reinvested
- Debt Relief Boot: Reduction in mortgage debt not replaced
- Personal Property: Non-real estate items included in sale
Tax Treatment
- Reinvested Portion: Full tax deferral on exchanged amount
- Boot Received: Taxed as capital gain in current year
- Depreciation: Recapture applies first to boot
Determine Cash Needs
Before listing your property, calculate how much cash you need and work with your tax advisor to understand the tax impact. Remember, you'll pay taxes on any boot received.
Structure Your Exchange
Work with National 1031 Center to structure your partial exchange. We'll help you maximize tax deferral while accessing the cash you need.
Sell and Receive Boot
At closing, you'll receive your designated cash boot directly. The remaining proceeds go to the QI for your replacement property purchase.
Complete Your Exchange
Follow standard 1031 exchange rules for the reinvested portion. Identify within 45 days and close within 180 days to defer taxes on the exchanged amount.
Partial Exchange Tax Example
$2 Million Property Sale Scenario
Property Details
- Sale Price: $2,000,000
- Original Purchase: $800,000
- Improvements: $200,000
- Adjusted Basis: $600,000 (after depreciation)
- Total Gain: $1,400,000
- Mortgage Payoff: $500,000
Partial Exchange Structure
- Cash to Take Out: $400,000
- Reinvested in 1031: $1,100,000
- New Property Price: $1,100,000
- New Mortgage: $500,000
- Down Payment: $600,000
Tax Calculation
Taxes on $400,000 Boot
- Depreciation Recapture (25%): $100,000
- Federal Capital Gains (20%): $60,000
- Net Investment Income (3.8%): $15,200
- State Tax (5% example): $20,000
- Total Tax Due: $195,200
Taxes Deferred on $1M Gain
- Depreciation Recapture: $100,000
- Federal Capital Gains: $160,000
- Net Investment Income: $38,000
- State Tax: $50,000
- Total Tax Deferred: $348,000
Bottom Line: You receive $400,000 cash, pay $195,200 in taxes, and net $204,800 while deferring $348,000 in taxes on your continued real estate investment.
Strategic Uses for Partial Exchanges
Personal Residence Purchase
Take cash from investment property sale to buy or improve your personal residence while keeping the rest invested.
Business Investment
Fund a business opportunity or expansion while maintaining your real estate portfolio for passive income.
Portfolio Diversification
Reduce real estate concentration by taking profits to invest in stocks, bonds, or other asset classes.
Debt Reduction
Pay off high-interest debt or reduce personal liabilities while continuing to build real estate wealth.
Estate Planning
Create liquidity for gifts or trusts while maintaining income-producing real estate for heirs.
Retirement Income
Take cash for immediate retirement needs while keeping properties for ongoing passive income streams.
Important Planning Considerations
Debt Replacement Strategy
If your property has a mortgage, remember that debt reduction is treated as boot. To minimize taxable boot:
- • Replace debt dollar-for-dollar on new property
- • Add cash to make up any debt reduction
- • Consider the combined effect of cash and debt boot
Timing Your Cash Needs
Strategic timing can optimize your tax situation:
- • Take boot in lower income years
- • Consider installment sales for spreading tax
- • Plan for estimated tax payments on boot
- • Coordinate with other tax planning strategies
State Tax Implications
State tax treatment varies significantly:
- • Some states don't recognize 1031 exchanges
- • Boot may be taxed at different state rates
- • Consider state tax when planning cash out amount
- • Consult state-specific tax advisors
Partial Exchange FAQs
How is the tax on boot calculated?
Boot is taxed as capital gain, with depreciation recapture applied first at 25%, then long-term capital gains rates (0%, 15%, or 20% federal). State taxes and the 3.8% net investment income tax may also apply.
Can I decide how much boot to take after seeing offers?
Yes, you can structure your exchange after accepting an offer. Work with your QI and tax advisor to optimize the cash/deferral balance based on your actual sale price.
Does taking boot affect my ability to do future exchanges?
No, taking boot doesn't prevent future 1031 exchanges. Your replacement property maintains its eligibility for future exchanges, carrying forward the deferred gain.
What if I need more cash than originally planned?
Once exchange funds go to the QI, you cannot access them without disqualifying the entire exchange. Plan conservatively and consider keeping a cash reserve outside the exchange.
Can I take boot by buying a less expensive property?
Yes, buying down creates boot equal to the difference in values. This is common when downsizing or moving to less expensive markets. Just remember all boot is taxable.
Balance Cash Needs with Tax Savings
Our experts will help you structure the optimal partial exchange for your unique situation.
Partial Exchange Planning Services
Questions? Speak with an expert: (877) 483-0427