It’s true that a 1031 exchange can help you reinvest in an institutional-grade property, defer the capital gains taxes and avoid tax on depreciation recapture. However, the only downside that comes with a 1031 exchange is you have to reinvest your entire proceeds to avoid the big tax bill.
So, if you are in need of money, there’s no way you could pull out cash from that transaction unless you are willing to pay capital gains taxes. However, a partial 1031 exchange might help you generate boot and use the gains for your personal expenses.
This article is dedicated to that. Read on to explore the partially done 1031 exchange and how to qualify for one.
An Overview On Partial 1031 Exchange
Normally, a traditional 1031 exchange requires you to sell your relinquished property and invest 100% of your proceeds into a new replacement property to successfully defer the capital gains taxes.
However, if you wish to retain a part of your proceeds from reinvesting, you can do a partial exchange and hold back a part of your proceeds for your personal use. A partial 1031 exchange allows you to do just that.
In short, a partial exchange allows you to create a boot when doing a 1031 exchange. A boot is the part of your proceeds you don’t reinvest in a replacement property. This boot is subjected to capital gains taxes.
Benefits Of Conducting A Partial 1031 Exchange
Yes, you would have to pay the capital taxes on the boot, but a partial exchange allows you to retain cash for your own personal needs. And, before we get into the possible benefits of a partial exchange, here’s a fact. A partial exchange can be done intentionally or by accident.
Intentionally occurs when you deliberately put back a certain amount of your proceeds from reinvesting. However, it can also happen by accident in case you reinvest in a property that is of lower value compared to the relinquished property.
A partial 1031 exchange can help you in the following ways:
- You can use the boot amount to cover an emergency expense like paying rent, tuition fees or just for leisure. In short, you can use the boot however you like.
- When doing a 1031 exchange, you must reinvest the proceeds in a replacement property equal to or greater value than the relinquished property. However, if you can not find a good property of equal or higher value, you would have to stick to a replacement property that might not offer good returns. However, a partial 1031 exchange allows you to reinvest in a property that might be of lower value but comes with greater returns.
- It can help you eliminate leverage or debt on the relinquished property. For instance, if your rental property is worth $1 million but still has $100 k debt, you can use a partial exchange to consolidate debt.
A partial exchange can be a great way to get your hands on extra cash while reinvesting your proceeds in a replacement property offering better returns. And while you might have to pay taxes on the boot, you can still use the amount to cover up your extra cash to cover your expenses.