David and Tom Moore, the 1031 Exchange Bros, share key points investors should consider as the year comes to a close. The focus is on practical planning and coordinating with tax and legal advisors to make smart, timely decisions.
Year-end timing and tax reporting
Exchanges are reported in the year they start. For example, if a sale closes in December 2025, that Exchange is a 2025 tax event, even if the replacement property isn’t acquired until early 2026. Filing an extension can be a practical solution if the Exchange is ongoing when the tax return is due.
Understanding boot
Boot is anything received in an Exchange that isn’t like-kind property, like cash, personal property, or certain debt adjustments. Examples include:
- If an investor takes $50,000 cash out at closing while exchanging the rest of the property, that $50,000 is taxable in the year received.
- If the investor pays off $100,000 in mortgage on the relinquished property but takes on less debt in the replacement property, the difference is taxable boot.
Installment sales and seller financing
Seller-financed transactions or installment sales can create boot. Interest payments are treated as ordinary income, and principal is taxed when received. For example:
- An investor who carries back a note on a property may receive cash over several years, but depreciation recapture and any debt relief are taxed immediately at sale.
Planning with a qualified intermediary or advisor can help structure the Exchange to minimize immediate taxable events.
Full vs. partial 1031 Exchanges
A fully deferred Exchange usually requires reinvesting all net proceeds into replacement property. Partial Exchanges are common and useful. For example:
- An investor may choose a $500,000 replacement property but take $100,000 in cash at closing. That cash is taxable boot, but the Exchange still defers tax on the rest of the gain.
Advisors can help ensure the equity and value calculations are correct before closing.
Timing considerations for refinancing
Borrowing against a property before sale can look like intent to extract equity rather than reinvest it. For example:
- A cash-out refinance just before listing may trigger boot.
- Waiting to refinance until after acquiring a replacement property can provide liquidity safely and support investment improvements.
Combining Section 121 with a 1031 Exchange
It is possible to combine primary residence exclusions under Section 121 with an Exchange for investment property. For example:
- A married couple sells a home that was their primary residence for three years and then used as a rental for two. Part of the gain may be eligible for Section 121 exclusion, while the remainder can be rolled into a 1031 Exchange.
Proper timing and documentation are key to applying both rules correctly.
Practical takeaways
Exchanges are both investment and tax decisions. Talking through options with experienced advisors is key. Before year-end, investors should:
- Identify if any sale triggers an Exchange and plan filing accordingly.
- Recognize potential boot exposure from cash, debt, or seller financing.
- Coordinate with tax and legal advisors before executing any transaction.
- Plan carefully when converting between primary and investment property.
- Ask the fundamental questions: what do I have, what do I want, and why am I doing this Exchange?
Smart planning and clear guidance can turn complicated transactions into manageable solutions.
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.
