A 1031 Exchange Does Not Have to Be All-or-Nothing

A common misconception is that every taxpayer completing a 1031 exchange must seek full tax deferral. In reality, some taxpayers choose a partially deferred exchange because it better fits their financial goals, liquidity needs, or replacement property strategy.

Partial exchanges are also more common than many investors realize. Ling and Petrova noted that in approximately one-third of exchange transactions, some tax is paid in the year the exchange is completed.¹

In a partial exchange, the taxpayer may reinvest only a portion of the sale proceeds or acquire replacement property with less debt than the relinquished property. This can result in “boot,” which generally refers to cash or other non-like-kind property received in an exchange. Common examples include cash boot, when the taxpayer receives some sale proceeds, or mortgage boot, when the debt on the replacement property is less than the debt paid off on the relinquished property.

While boot is generally taxable, a partial exchange may still provide meaningful tax deferral compared to a fully taxable sale. Taxpayers considering a partial exchange should review their goals and potential tax consequences with their tax and/or legal advisor before closing on the sale of the relinquished property.

¹ Ling & Petrova, The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate (2020), submitted to the Real Estate Research Consortium.

1031 Basics: Understanding Boot

Boot is any non-like-kind real property received by the taxpayer and is taxable to the extent there is capital gain. “Cash boot” is the receipt of exchange proceeds by the taxpayer. “Mortgage boot”, also sometimes referred to as “debt relief,” is the taxpayer having less debt on the replacement property or properties than they had on their relinquished property. Cash or mortgage boot can be offset by the taxpayer adding outside cash to the replacement property purchase. If the taxpayer wants to receive cash boot, it must be received either at the closing of the relinquished property or after they have purchased all property they are entitled to under the exchange agreement, which is generally the end of the exchange period. 

Webinar: 1031 Tax-Deferred Exchanges

Tuesday, June 30
1:00 PM - 3:00 PM CT

This two-hour course for commercial brokers provides a concise and thorough overview of 1031 exchanges. This webinar tackles advanced issues such as partnership/LLC scenarios, creative property variations such as perpetual cellular easements (cell towers), fractional ownership, transferable development rights, reverse and improvement exchanges, how to avoid common pitfalls and related-party transactions.

👋Meet Nikki Hofer, Controller

Nikki has been with API for five years, starting as Banking Supervisor in 2021 and stepping into the Controller role two years ago. She now leads the Banking Department, keeping client funds secure and ensuring wires are accurate and on time.

Outside of work, Nikki stays busy with her two toddlers, spending time with family, walking her dog at the park, and enjoying a good book.

What stands out most? The people.
“Everyone genuinely cares about each other, and we work as a team to serve our clients.”

We’re grateful to have Nikki helping support the secure, timely handling of client funds throughout the exchange process!

Disaster Relief Extension Information

If your exchange has been impacted by a federally declared disaster, you may qualify for an extension of certain 1031 exchange deadlines.

Review current IRS disaster relief information here:
irs.gov/newsroom/tax-relief-in-disaster-situations

Additional 1031 exchange disaster information is available here:
apiexchange.com/disaster-relief/

Talk to a 1031 exchange expert today.

Mike Willoughby
Division Manager
833.576.1031
mike@apiexchange.com

YOUR GOALS. YOUR TIMELINE. OUR EXPERTISE.
We're here to help make sure your exchange is smooth, compliant, and successful.