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Strategic Partial 1031 Exchanges for Savvy Investors

Are you interested in selling a property and using a portion of the proceeds to invest in another property – but want to keep part of the sale price as cash? Then a partial 1031 exchange is right for you, so long as you are willing to pay a portion of capital gains taxes. Below, we’ll outline how a partial 1031 exchange works and how we can help you make sure that you maximize your investment and minimize your tax payments.
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Definition of Partial 1031 Exchange

In a traditional 1031 exchange, you can sell one property and acquire another of like-kind, for business use or investment purposes, and defer the capital gains taxes. But what if you are interested in reinvesting only a portion of the proceeds from the sale into the new property? Partial 1031 exchanges let you take a portion of the proceeds in cash for immediate use, but require that you pay a portion of capital gains taxes. 

Eligibility Criteria for Partial Exchanges

As with all 1031 exchanges, the exchange must be of real property for business use or investment, and the reinvestment of proceeds must equal or exceed the net sale value of the relinquished property. You are also subject to the applicable deadlines for 1031 exchanges: you have 45 days from the sale of your original property to identify the new property you want to acquire, and 180 days for the exchange to be completed.   

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The “Boot”: a Key Consideration for Partial Exchanges

The portion of the proceeds from the exchange that are not reinvested are called “boot,” and are subject to depreciation recapture and capital gains taxes. The boot usually comes as cash, an installment note, or even debt relief and so is a taxable gain or “additional value received” in the exchange. 

 

When considering a partial 1031 exchange, it is also wise to plan for liquidity needs, when tying up capital in these real estate investments. At 1031 Pros, we are experts in partial 1031 exchanges who can help guide you through important strategic decisions.

Advantages of Partial 1031 Exchanges

In addition to putting cash in your pocket, partial 1031 exchanges have other benefits to real estate investors:

New Investment Opportunities and Cash Flow

Partial 1031 exchanges can help you diversify your portfolio and enjoy higher returns on your investment. For instance, if you have a property that has grown in value but is not creating the cash flow you would like to see, you can sell a portion of that property and invest the proceeds into a property with higher yield, benefitting your cash flow. 

Increase Depreciation Benefits, Reduce Tax Liability

The tax deduction that lets you write off part of the cost of your investment property every year is called depreciation. Buying a new property through a partial 1031 exchange can increase your depreciation benefits and thereby reduce the tax you owe. 

Reduce Risk and Create Financial Security

Diversifying your real estate portfolio through a partial 1031 exchange can also help you spread risk across more properties and so reduce your overall exposure. This can help you build a strong financial foundation, not only for you but for generations to come. 

Financial Strategies Involving Partial Exchanges

1031 exchanges are designed to help you optimize financial outcomes through strategic reinvestment in property for business use or investment purposes, and partial 1031 exchanges can be part of this strategy. If you need cash to pay down debts, for personal spending, or for any other reason, you can still build a strong portfolio and defer part of the capital gains taxes on a property sale. Our experts have handled many cases like this before, and are ready to help you create a smart strategy for reinvestment and cash liquidity. 

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Managing Risks in Partial 1031 Exchanges

There is a financial risk in partial 1031 exchanges, because you are liable for a portion of the capital gains taxes. And as with all real estate investing, there is also a risk of property underperformance, and legal risks if you are not in full compliance with 1031 exchange regulations. We stay up to date on all relevant rules and regulations and can help you navigate the complexities of partial exchanges.

Tax Reporting and Compliance

As a qualified intermediary, we will help ensure total compliance with 1031 exchange regulations, to ensure that your exchange is successful. Important considerations include: 

 

Like-Kind Property: Your replacement property must be “like-kind” to your relinquished property, meaning that it must be real property used for business or investment purposes.  

 

Deadlines: You must identify a replacement property within 45 days of the sale of your relinquished property, and complete the exchange within 180 days.

 

Property Value: The value of the replacement property must be the same or more as the value of the relinquished property.

 

At 1031 Pros, we will help you create the right strategy for your exchange, and in the case of partial exchanges we will help ensure that you are fully compliant and prepared for the partial tax liability.

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Selecting Properties for Partial Exchanges

Before acquiring a replacement property, you should undertake thorough research on it, including the location, value, market conditions, potential income from renting, and any outstanding liabilities or legal issues. Our financial, tax, and legal experts will help you stay informed about trends and regulatory considerations so you thoroughly understand the potential impact of reverse exchanges on your investment portfolio.

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Whether you're ready to sell today or in the future, we are happy to answer any questions you may have about your real estate portfolio.

 

Reach out to learn how we can help save you money and grow your portfolio.

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  • What type of property qualifies for a 1031 exchange?
    Any property held for productive use in a trade or business or for investment can be exchange for like-kind property. "Like-kind" refers to the nature of the investment. Any type of real property can be exchanged for another type of real property. For example: A single family rental can be exchanged for a duplex. Raw land can be exchanged for a shopping center or an office space for apartments. Any combination will work. This gives the investor flexibility to change investment strategies to fulfill their portfolio needs.
  • What Does Not Qualify?
    A personal residence, developed lots, home flipping, partnership interests or property held for resale immediately after acquisition. Second homes may or may not qualify depending upon the use and how it's reported for income tax purposes.
  • What kind of exchanges does 1031 pros handle?
    We handle all types of exchanges: Delayed Exchanges, Reverse Exchanges and Build to Suit Exchanges. From the simple to the complex, we can handle any type of exchange.
  • Does 1031 Pros handle exchanges in any state?
    Yes. We can handle exchanges for any property in any of the 50 states.
  • How much notice do I need to do a 1031 Exchange?
    You can do a 1031 exchange any time before closing on the sale of your investment property. Like we said before, we're fast.
  • How long do I need to own my investment property before I can exchange it for another?
    There is no set timeline, but to avoid any issues you should at least own it for a minimum of 12 months.
  • What happens if I don't close on my replacement property within 180 days?
    Then you just pay the capital gain taxes like your would have if you were to sell the property in the first place.
  • Can I sell one property and exchange into multiple properties?
    Yes, in most cases you can exchange into three other properties.
  • Why should I use a qualified 1031 intermediary to do my exchange?
    We will prepare all the correct paperwork you will need to file your taxes with. We will also ensure you meet your timelines and any other specifics of the 1031 tax code.
  • What if my Title company is a qualified 1031 intermediary?
    1031 Pros specializes in exchanges and has the expertise, experience and history to ensure an audit free exchange.
  • What is a reverse exchange?
    A reverse exchange is when you close on the purchase of the replacement property before you close on the sale of the relinquished property. Many real estate investors will utilize a reverse exchange to acquire a replacement property in a market where there may be competing offers or there is a need to close fast. Because of our vast experience handling these types of exchanges, we offer very competitive rates and are willing to match any competitor pricing.
  • What is an improvement exchange?
    Also referred to as a construction exchange or build-to-suit exchange, improvement exchanges offer real estate investors nice benefits, which often result in better investment opportunities than properties readily available on the market. The ability to remodel, add capital improvements, or build from the ground up, while using tax-deferred dollars, allows an investor to reinvest in a replacement property that meets their exact investment criteria.
  • What is the Federation of Exchange Accommodators?
    The Federation of Exchange Accommodators (FEA) is the only national trade association organized to represent professionals who conduct like-kind exchanges under Internal Revenue Code §1031. Members include Qualified Intermediaries (QIs), their primary tax and legal counsel, and affiliated industries (TIC sponsors, banks, real estate brokers, title companies, settlement/escrow agents, etc.). 1031 Pros is a proud member of the FEA.
  • Can I 1031 exchange into a Tenancy in Common or Triple Net Lease Property?
    Yes, you can exchange into a Tenant In Common (TIC) or Triple Net Lease real estate investments. The biggest rule of thumb is that your name is on the title as an owner with a percentage of ownership. These types of real estate investments offer a great passive income for those who are done with being a landlord and are ready to sit back and collect a monthly check. We do not offer these types of investments at 1031 Pros, but we have some great partners who do. Call us today to learn more.
  • Does my personal residence qualify for a 1031 exchange?
    No, it does not. Personal residences qualify for different tax benefits under IRS Code Section 121. Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale. 1031 Pros does not offer any services or tax advice for personal residences. Please contact our trusted Accounting partners under the "More Tab" for more information on Section 121. Tell them 1031 Pros sent you!
  • Are my funds insured?
    Each of our exchanges uses a unique, individual, FDIC insured account. 1031 Pros also has additional bonding and insurance, so your funds are always safe and secure.

Have More Questions? Send Us a Message.

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