Many people ask, “is 1031 a zero-sum game?” In other words, do you have to do a 100% tax-deferred exchange? What if you want to take some boot and recognize some gain? Can you do a partial 1031 exchange of real estate?
The answer is yes, you can do a partial 1031 exchange. You don’t have to reinvest 100% of your sales proceeds into the replacement property, nor do you have to buy a replacement property of equal or greater value. If you’re comfortable doing a lesser exchange (not deferring all of your gain), you can do that!
In a 1031 exchange, you defer gains dollar for dollar to the extent that you buy replacement property of a value greater than your transferred basis. So if you sold a property and your basis in the relinquished property was $300,000, and then you bought a replacement property, your old basis of $300,000 transfers over to the new property. You only start deferring gains to the extent that you’re buying value over and above your transferred basis. So if your new replacement property is worth $500,000 then you’ve only deferred the gains on $200,000 because the first $300,000 was absorbed by your transferred basis.
Anytime you do a partial 1031 exchange you may be amazed that there is a tipping point at which it may not make sense to do an exchange because you bought down in value so much that you recognized most or all of the gains you had. Any significant amount of boot or buying down in value on your replacement property should be discussed with your accountant. You should get an idea of how much you’re deferring in tax as opposed to how much you’re recognizing and paying in tax liability by doing that partial 1031 exchange.
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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