During a standard 1031 exchange, a person exchanges like-kind property for like-kind property of equal or greater value in order to defer paying capital gains on the sale of their relinquished property. But what if you stand to make a significant amount of money on the sale of a property and you can’t find a property to reinvest the full sale amount into? Or maybe you simply want to pull some cash out from the sale to use in other ways. This leads to what is known as a partial 1031 exchange, and in today’s blog, we explore how they are handled and what you need to know when it comes to tax liability.
The Basics Of A Partial 1031 Exchange
As we touched on in the intro, in order to have a fully tax-deferred 1031 exchange, you must purchase replacement property of equal or greater value and put all the net proceeds from the relinquished property towards the new replacement property or properties. If you’re opting not to meet one of those two requirements, you will be moving forward with a partial exchange.
There will be more tax implications for individuals who elect to move forward with a partial 1031 exchange, but you also have some additional options available to you. Some options to discuss with your 1031 advisor include:
Purchasing fractional ownership in additional replacement property to make up the shortfall.
Offsetting boot with carryforward losses or with depreciation on a newly acquired property.
Putting all of the cash from the sale of their relinquished property towards the replacement property and then later pursuing a cash-out refinance on the replacement property.
As you can see, even if you are planning on moving forward with a partial 1031 exchange, you have options to defer paying capital gains taxes. We’d be happy to go over your options and ensure that you make the smartest financial decision during your partial 1031 exchange. To ensure everything proceeds as needed and with your best interests at heart, connect with the team at CPEC 1031 today at (612) 643-1031.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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