Partial Exchange

 Two common misconceptions surrounding 1031 exchanges include the requirements that exchangers must (i) use all the proceeds from the sale toward the purchase and (ii) that the purchase must be greater in value compared to the sale. These requirements hold true for a fully tax-deferred exchange. Fortunately, a 1031 exchange is not an all or nothing deal, and exchangers may still enjoy a partial exchange: keeping money from the sale or purchasing property lower in value. However, these scenarios do bring their own tax implications.

Taxable "boot" is created in the case of keeping money outside the exchange and not using all the proceeds toward the purchase. Cash boot can be created upfront by keeping money outside the exchange, or at the end of the exchange with remaining cash in the exchange that was not used for the purchase. While the exchange is not disqualified, the money retained by the exchanger will be subject to capital gains tax. Similarly, when an exchanger purchases down in value, the exchange is not disqualified, but creates a tax consequence. Here, the tax applies to the price difference between the sale and purchase. In both of these options, the 1031 exchange is still effective insofar as the tax bill created in the exchange is lesser than the adjusted basis of the property sold.

Both of these scenarios are declared by the exchanger to the IRS in Form 8824. When taxpayers file for taxes, Form 8824 is included to put the IRS on notice that a 1031 exchange transpired as opposed to a conventional sale. This form takes into account that cash could have been retained or that the purchase was lower than the sale. In either case, partial exchanges provide taxpayers with the best of both worlds: deferring substantial capital gains taxes while either keeping some money from their sale or purchasing property lower in value. Please contact CR Capital 1031 for further questions and structuring a partial 1031 exchange.