Partial 1031 Exchange
“Get Cash Now and Defer Some Capital Gains Taxes”
Even though an investor can defer 100% of their capital gain tax liability through a 1031 tax-deferred exchange, some investors choose only to postpone a portion of their capital gain tax liability.
What Is A Partial Exchange?
During a partial exchange, the investor defers capital gain taxes and recognizes gain either by receiving cash proceeds or by reducing their replacement property debt – both of these events result in receiving boot, which is any property that is not considered “like-kind” in an exchange. During an exchange, cash is booted. Exchangers reduce their mortgage liabilities on replacement properties through mortgage boot, and an actual property exchange transaction also considers any personal property received by the boot.
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What Is The Timeframe For Receiving Cash Proceeds?
A closing officer instructs the Exchanger to direct a fixed dollar amount of proceeds from the sale of the relinquished property to them; If properties have been identified but not yet purchased after the end of the exchange period.
Can An Exchange Provide Full Tax Deferral?
Two specific requirements must be met by exchangers who wish to perform a tax-deferred exchange instead of a partially deferred exchange: The replacement of the existing property should be carried out with the entire net equity (net proceeds); Purchase a replacement property with the same or more outstanding debt. In addition to the second requirement, Exchangers may offset a reduction in debt by adding cash to the replacement property closing.
Exchanges Are Not Always A Good Idea.
You shouldn’t exchange if the boot exceeds the capital gain.
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