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Discussing 1031 Partial Exchange in detail

Jeffrey is planning to sell an investment property and wants to purchase a new investment property. He would like to defer the capital gain through a 1031 exchange, but he also needs to keep some of the cash from the sale with himself. He wishes that he could do both. So we can help him out in getting out of this situation.

There is a misconception in the mind of the investor that he cannot keep any proceeds from the sale of the relinquished property if he wants to complete the 1031 exchange. This is right if he is going to defer 100% taxes owed after the sale, but, if he is going to keep some portion with him, then he can pay for the preserved part.

An investor who needs the cash now, to pay the medical bills, or might be for a vacation that is long past due. Whatever the case, rather than refinancing, taking out a new loan or withdraw the cash from a 410K or find the money from anywhere else, the investor finds it more profitable to sell the property to obtain the needed from the sale.  Therefore a portion of the proceeds can be cashed out for the immediate use and use the remaining cash to reinvest into the new property through a partial 1031 exchange. 1031 exchange rules never limit you from completing an exchange if you don’t want to reinvest the entire proceeds of your sale. 

While doing the partial 1031 exchange, the money decided by the investor to keep is considered as a boot. In most of the 1031 exchange boot are an unpleasant surprise and inevitable reality. Therefore 1031 exchange boot can be defined as the “additional value received.”

So, Jeffrey understood from here that he couldn’t keep the profit from the sale of his investment property, and couldn’t he cash out his equity without paying to taxes.

Partial 1031 exchange is beneficial for the investors who want to liquidate the cash; here we have explained some strategic reasons that investor may consider for a partial exchange:

  1. Partial exchanges help the investor to offset the investment losses.
  2. Partial exchanges provide the investor a way to re-allocate their investment funds.   He can even liquidate some of his real estate holdings through a partial exchange to reduce the overall percentage of real estate in his investment portfolio.


If the investor is not planning for the partial exchange, then there are some general rules that should be kept in mind for the 100% deferment of the capital gain taxes through a 1031 exchange:
1.     Buy the replacement property of the equal or higher value of the relinquished property.
2.     The mortgage amount taken out for the finance of the replacement property should always be equal to higher than the amount owed on relinquished property.
3.     The equity amount held for replacement and relinquished property should always be equal to or greater than.
Here we recommend you to get in touch with the tax advisor before completing any real estate transactions to ensure the investor to understand the amount of taxes that will be owed wholly.
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Location: United States

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