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.
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.
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.
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 than 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.
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.
Contact Us Today
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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Can I use a 1031 exchange for a property I occasionally use for personal vacations?Yes you can, so long as you rent the property for more than 14 days per year for the first two years, and use it for personal use fewer than 14 days per year and no more than 10% of nights rented. Got questions? Call us at 916-252-6900 and our 1031 vacation home exchange experts will walk you through the details.
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What are the IRS rules for using a vacation home in a 1031 exchange?At the time of the 1031 exchange, the primary intent of the investor to use the replacement property for investment purposes is the determining factor as to whether it is for personal use or as an investment. Also, only dwelling units are eligible for these exchanges. For more details, contact us at 916-252-6900 for a free consultation on setting the right strategy for your 1031 vacation home exchange.
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How long must I hold a property before it qualifies for a 1031 exchange?There is not a specific amount of time that you must hold a property before using it in a 1031 exchange, but the IRS will look at your intent – you must have had the intention to use the property for investment purposes, which could include renting the property at a fair market value.
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What are the potential tax consequences if my vacation home does not qualify?If your vacation home does not qualify, you may be responsible for paying capital gains taxes on the sale of your relinquished property.
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Can I use a 1031 vacation home exchange for international properties?We can handle 1031 exchanges of all types, including those of foreign property with like-kind property both at home or abroad. Call us at 916-252-6900 to learn more.
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How much does a 1031 vacation home exchange cost?Pricing is determined on an individual basis, but at 1031 Pros we offer competitive prices and are willing to match anyone else’s offer.
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What is a reverse 1031 exchange and how does it differ from a traditional exchange?In a traditional 1031 exchange, you sell a property (known as the relinquished property) and then buy a new property of like kind (known as the replacement property for business use or investment purposes). In a reverse 1031 exchange, this order is reversed, enabling you to acquire new property before you have sold your original property.
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What are the time limits involved in a reverse 1031 exchange?You have 45 days to identify a new replacement property and 180 days to complete the exchange, or you might be liable for capital gains tax.
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What happens if I can't sell my original property after completing a reverse 1031 exchange?You might be liable for paying capital gains tax when you sell your original property.
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How do I fund a reverse 1031 exchange?It is important to ensure that you have sufficient funds to acquire the new property, including all potential fees, before you start. In some cases, you can obtain financing for reverse 1031 exchanges, but some lenders are hesitant to enter into this arrangement. We’ll work with you to explore options and mitigate risks.
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Can I use a reverse 1031 exchange for international properties?We can handle 1031 exchanges of all types, including those of foreign property with like-kind property both at home or abroad. Call us at 916-252-6900 to learn more.
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How much does a reverse 1031 exchange cost?Pricing is determined on an individual basis, but at 1031 Pros we offer competitive prices and are willing to match anyone else’s offer.
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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.
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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.
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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.
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Does 1031 Pros handle exchanges in any state?Yes. We can handle exchanges for any property in any of the 50 states.
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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.
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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.
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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.
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Can I sell one property and exchange into multiple properties?Yes, in most cases you can exchange into three other properties.
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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.
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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.
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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.
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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.
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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.
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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.
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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!
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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.
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What is considered a "like-kind" property in a 1031 exchange?A like-kind exchange occurs when you want to sell an asset and acquire a similar one, while avoiding capital gains tax. These are heavily monitored by the IRS and require oversight to ensure that no tax penalty is incurred.
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How long do I have to identify a replacement property?You have 45 days to identify a replacement property for your 1031 exchange.
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What are the tax implications if I miss the 1031 exchange deadline?If you miss the 180 day deadline, you will be responsible for paying capital gains taxes, as if it were a standard sale of real estate.
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How do I choose a qualified intermediary for my 1031 exchange?You want your qualified intermediary to be an expert on 1031 exchange regulations and well connected with property managers, real estate companies, and financial experts. You also want a highly responsive intermediary who is always available when you have a question. At 1031 Pros, we are that intermediary.
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Are there any types of real estate that do not qualify for a 1031 exchange?To qualify, the property must be a business or investment rather than personal property. Your home does not qualify under Section 1031 of the IRS tax code, nor does property held for sale (such as spec houses, building lots, and flips), stocks including those in a Real Estate Investment Trust, bonds, mortgages, and notes.
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How much does a 1031 exchange cost?Pricing is determined on an individual basis, but at 1031 Pros we offer competitive prices and are willing to match anyone else’s offer.
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What is a partial 1031 exchange, and how does it work?A partial 1031 exchange lets you sell one investment property and reinvest a portion of the proceeds into another property of like-kind, but keep part of the sale funds as cash. Because you are only reinvesting part of the money, you will be responsible for paying a portion of capital gains taxes on the sale.
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How do I calculate the tax on the cash received (boot)?Every partial 1031 exchange is unique, and we know how to handle them all. Call us at 916-252-6900 for a free consultation to discuss your situation, and we will help you calculate the taxes on cash received and create a strategy that will make your partial 1031 exchange successful.
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Can partial 1031 exchanges be used for international properties?We can handle 1031 exchanges of all types, including those of foreign property with like-kind property both at home or abroad. Call us at 916-252-6900 to learn more.
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What are the risks associated with partial 1031 exchanges?In addition to being responsible for paying a portion of capital gains taxes, there are other risks that are familiar to real estate investors – such as property underperformance and legal concerns that arise if you are not compliant with 1031 exchange regulations. When you call us for a free consultation, we will help you review these risks and set a strategy for success.
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How should I select a qualified intermediary for a partial exchange?At 1031 Pros, we are experts in all 1031 exchanges. Serving all 50 states, we will ensure that you have all of the appropriate documents, are in full compliance with regulations, are set up with a unique FDIC-insured individual account for your exchange, coordinate with your title company, and more. Unlike other qualified intermediaries, we also go the extra mile – providing access to a network of property management and real estate advisors after your exchange, and helping you create long-term investment strategies. And of course, our customer service is the number one reason that investors choose to work with us: we stay one step ahead of the process and respond quickly and accurately to questions.
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How much does a partial 1031 exchange cost?Pricing is determined on an individual basis, but at 1031 Pros we offer competitive prices and are willing to match anyone else’s offer.
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Can I use a 1031 exchange for building improvements?You absolutely can, putting funds from the sale of your relinquished property toward improvements on your replacement property with a full deferral of capital gains taxes, so long as you meet the deadlines and IRS regulations associated with 1031 exchanges.
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What is a 1031 improvement exchange, and who can benefit from it?A 1031 improvement exchange lets you use pre-tax dollars from the sale of your relinquished property to increase the property value of your new, replacement property through enhancements to existing structures. All while deferring capital gains tax.
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What are the critical timelines I need to be aware of?Your replacement property must be identified within 45 days of selling your relinquished property, and the entire transaction – including all improvements specified in the exchange – must be completed within 180 days.
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Can I handle the construction management myself?Acting as project manager for the construction, you will send invoices to 1031 Pros, as your EAT, to be paid directly to your vendors. We will work closely with you to ensure that all funds are handled correctly.
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What happens if the improvements are not completed on time?If the improvements on the replacement property are not completed within the 180 timeline, you will be liable for capital gains taxes on the sale of your relinquished property. We are experts in all aspects of 1031 exchanges; call us at 916-252-6900 to discuss your plans and we will help make sure that your exchange goes smoothly.
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How do I choose a qualified intermediary for an improvement exchange?You want to find a qualified intermediary with experience in 1031 improvement exchanges. They will ensure that you have all of the appropriate documents, are in full compliance with regulations, are set up with a unique FDIC-insured individual account for your exchange, coordinate with your title company, and more. At 1031 Pros, we do all of this in all 50 states in the U.S., as well as bringing you access to a network of property management and real estate advisors after your exchange, and helping you create long-term investment strategies. When selecting a qualified intermediary, be sure to read customer reviews and testimonials and choose one that answers the phone when you call, no matter what time, and responds to emails within 24 hours. 1031 Pros is that qualified intermediary, and we are ready to help you with your exchange.
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How much does a 1031 improvement exchange cost?Pricing is determined on an individual basis, but at 1031 Pros we offer competitive prices and are willing to match anyone else’s offer.
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What are 1031 exchange services and how can they benefit me?Unlike traditional real estate transactions, where you sell one business or investment property and buy another – and pay heavy capital gains taxes along the way – 1031 exchanges let you defer capital gains taxes. When choosing what types of properties to include in your real estate portfolio, working with a Qualified Intermediary to ensure compliance with tax regulations and set a long-term investment strategy will help you grow your portfolio faster.
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Are there different types of 1031 exchange services?There are, based on when you sell your relinquished property and acquire a replacement property. We handle all types of exchanges, including in-kind, reverse, partial, and new construction exchanges.
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How do I choose the right service provider for a 1031 exchange?You want a Qualified Intermediary with extensive experience handling all types of 1031 exchanges, who is up on the latest regulations, who has a good reputation, and provides excellent and quick customer service. At 1031 Pros, we check all of these boxes and more.
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What are the common mistakes in 1031 exchanges and how can they be avoided?The biggest mistake is meeting deadlines: the 45 day timeline for identifying a replacement property and the 180 day timeline for completing the exchange. If you miss these deadlines, you are responsible for paying capital gains taxes on the sale of your relinquished property. Another mistake is not being in compliance with IRS regulations. At 1031 Pros, we will help you navigate the complexities of exchanges successfully.
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How long does a 1031 exchange take from start to finish?This depends on the type of exchange. If you have already identified (or even acquired) a replacement property, then the process is quicker than if you are looking for a replacement property or undertaking construction or improvements on the new property. Call us at 916-252-6900 for a free consultation and, depending on the needs of your exchange, we will be able to advise you on what timeline to expect.
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How much does a 1031 exchange cost?Our 1031 exchange solutions are priced competitively with those of other 1031 exchange service providers, and we will match the price quote you receive from any other services – while bringing our world class, responsive customer service to your exchange.
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Can 1031 exchange services help with property outside the U.S.?We can handle 1031 exchanges of foreign property with like-kind property both at home or abroad. Call us at 916-252-6900 to learn more.
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What should I prepare before contacting a 1031 exchange service provider?If you have already acquired your replacement property, then you should come to the conversation with details on the new property. If you are undertaking new construction or improvements on a replacement property, then you should bring information on the property, planned improvements, and the details of any related construction loans. If your exchange is like-kind or partial, then you should bring information on the properties.
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How does a 1031 exchange apply to new construction projects?In some ways a New Construction 1031 Exchange is similar to other 1031 exchanges: the 180 day timeline, the importance of not owning both properties at the same time, and compliance with all IRS regulations. However, with new construction there are other steps in the process, such as working with a Qualified Intermediary like 1031 Pros to set up a special purpose entity and pay for improvements. Contact us at 916-252-6900 with any questions or to get the process started.
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What are the time constraints in new construction 1031 exchanges?45 days to identify your replacement party, and 180 days for the acquisition to be finalized.
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Can I manage the construction process myself in a 1031 exchange?Yes, you or an appropriate representative will serve as the project manager on the construction process, working with us as your Exchange Accommodation Titleholder (EAT) to pay vendors using exchange funds.
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What are the risks involved in new construction 1031 exchanges?Construction projects sometimes run past projected deadlines, exceed their allotted budgets, and experience market fluctuations during the life of the project. The experts at 1031 Pros will work with you to ensure that you are set up for success.
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How do I select a qualified intermediary for a construction-focused 1031 exchange?You should choose a Qualified Intermediary with deep expertise on 1031 exchange regulations, particularly those that are new construction or improvement projects. You also want a partner who is available to answer questions at any time. At 1031 Pros, we always answer the phone when you call and are ready to help you know what you need to know, and what you need to do next.
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How much does a new construction 1031 exchange cost?Pricing is determined on an individual basis, but at 1031 Pros we offer competitive prices and are willing to match anyone else’s offer.
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What exactly does a qualified intermediary do in a 1031 exchange?They will carefully and accurately prepare the exchange agreement, assist with writing contracts, set up an individual secure account for each exchange, coordinate all transactions, work with legal advisors and title companies, report to you regularly, and prepare all of the tax documents you need to avoid paying capital gains taxes.
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How do I choose a qualified intermediary for my exchange?You want to find a qualified intermediary with experience in the particular kind of 1031 exchange you need. You also want to make certain that they have experience in the state where your exchange will take place. At 1031 Pros, we are that QI, and then we go farther – providing you access to a network of property management and real estate advisors after your exchange and helping you create long-term investment strategies. We are also proud of our highly responsive and helpful customer service; we answer the phone when you call, anytime day or night, and respond to emails within 24 hours.
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What are the key qualifications a good intermediary should have?They should be an expert advisor on the different options you have when it comes to 1031 exchanges, and then experience in the type of 1031 exchange that you want to undertake. They should be appropriately licensed, fully bonded, insured, and a member of the Federation of Exchange Accommodators. They should also operate with the highest ethical standards to protect your funds in an individual, unique account, and be committed to fast, responsive, and accurate customer service.
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What are any risks involved in using a qualified intermediary?The risks come with not using a qualified intermediary who is deeply experienced in the relevant type of 1031 exchanges, who are not meticulously detailed when it comes to every transaction, and who do not coordinate and communicate with all parties involved in order to make sure that your exchange is successful.
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How can I ensure my funds are secure with a qualified intermediary?Your QI should always deposit any funds from an exchange into a separate and unique FDIC-insured account, secured with dual signature requirements. They should also be transparent when it comes to reporting and adhere to strict ethical standards regarding handling funds.
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What should I expect from my intermediary during the exchange process?You should expect for your QI to come to the table with expertise in 1031 exchanges, to be highly responsive to any questions and even proactively communicative with you and other parties, and to deliver all documentation, thoroughly prepared, at the right times. At 1031 Pros, we are ready to help you with your exchange, no matter what type you need to undertake. Call us at 916-252-6900 for a free consultation and to get started.