Partial 1031 Exchange And Tax Consequences
Learn what a partial 1031 exchange is and it could help you eliminate or defer capital gains taxes when you buy and sell investment property.
Partial 1031 exchange occurs when an investor chooses to defer some capital gain tax, not all.
In a partial 1031 exchange, the investor decides to defer some capital gain taxes, and also recognize some gain by either 1) taking out some cash from the proceeds or 2) through debt reduction on their replacement property. Both events can result in boot, which refers to 'anything received in addition to' the replacement property. It could be cash boot or mortgage boot. Any personal property received in the exchange is also considered boot.
An investor can receive cash proceeds in different ways.
· The investor can ask the closing officer to transfer a part of the proceeds from their relinquished property directly to their account.
· After the exchange, if there are properties that have been identified but not purchased, then it can result in boot as well.
How to do a fully tax-deferred exchange?
If an investor to do a fully tax-deferred exchange and not a partial 1031 exchange (https://1031xchange.com/
· Reinvest the entire sale proceeds in one or more replacement properties.
· Buy one or more replacement properties with equal or greater debt. [An exception to this requirement is that the investor can offset a reduction in debt by adding cash to the replacement property.]
When shouldn't you do a partial 1031 exchange?
Undoubtedly, a partial 1031 exchange gives investors cash and asset at the same time. However, not every time doing a partial 1031 exchange turns out to be beneficial. For example, if the boot is more than your capital gain, you should refrain from doing an exchange.