A common question investors ask is whether they must fully replace value and equity for a 1031 Exchange to work, or whether they can complete a partial Exchange. David and Tom Moore, 1031 Exchange Brothers Equity Advantage, explain how the rules operate in real transactions, and how you can use them to increase the flexibility of your investment.
You Do Not Need to Fully Replace Value and Equity
Contrary to what many think, you do not you have to meet the full value and equity requirements for a 1031 Exchange. Partial Exchange transactions are very common. Many investors do not want to take on new debt or add additional cash. Instead, they may choose to go down in value. When this happens, they may end up with some debt relief and pay taxes only on that portion. Even with that outcome, the 1031 Exchange remains valid.
Understanding Boot and the Benefits of Going Down in Value
Boot is anything the taxpayer receives from the transaction that is not real estate. Boot is usually received as cash or debt relief. It can also be personal property, though that is not common.
When an investor goes down in value, they might have debt relief or receive cash back. They would pay taxes only on that portion, not on the entire transaction. Some investors move across or up in value but still want to take some cash out. This is also allowed. They can receive cash and still complete a valid 1031 Exchange.
When Investors Can Receive Cash
Investors often want to know when they can actually receive cash. The first opportunity is at the close of escrow. If the taxpayer receives cash at closing and that money never comes into the Exchange facility, that timing works within the rules.
Making Confident Choices in a Partial 1031 Exchange
Whether you are moving down in value, taking some cash, or managing debt relief, a partial 1031 Exchange can still deliver tax advantages. The key is understanding how boot works and planning ahead.
If you are preparing for a sale or weighing your options, call the team at Equity Advantage today to get the information you need to make the best decisions for your 1031 Exchange.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
