Tom Moore of Equity Advantage 1031 Exchange hears this question frequently: do investors have to reinvest every single dollar from a property sale to qualify for a 1031 Exchange? The simple answer is no. Partial 1031 Exchanges let investors take some cash out while still deferring the majority of their tax liability.
Tom explains how partial Exchanges work, why they are becoming more common, and what investors need to know to avoid surprises.
Why Partial 1031 Exchanges Are Increasing
Tom notes that more investors today are open to taking cash out at closing. They are willing to accept some tax exposure instead of reinvesting every dollar.
“They just do not want to pay taxes on the entire capital gain,” Tom says.
Often, investors are not aware this is possible until they speak with a Qualified Intermediary. Some may initially plan to take a large sum of cash at closing, assuming they will pay taxes on it, but adjust their strategy as the transaction progresses. Tom gives a recent example of an investor who initially planned to pull $150,000 at closing but ultimately took only $25,000.
Partial Exchanges give investors flexibility and control over liquidity, but careful planning is required.
Understanding Boot
Cash taken from a 1031 Exchange is called boot. Boot includes any cash or non-like-kind property received in an Exchange that is not part of the replacement property. Boot is taxable to the extent it represents realized gain.
If an investor takes cash out at closing, that cash is considered boot. The remainder of the gain can still be deferred through the Exchange. Understanding boot is critical for planning partial Exchanges effectively.
Timing and Handling of Cash
Tom emphasizes that how funds are handled at closing is key.
If sale proceeds are routed through a Qualified Intermediary’s Exchange account, the investor cannot access them without disrupting the Exchange.
“If it comes to us, then they cannot get that money,” Tom explains.
Any cash an investor wants must be disbursed directly to them by the title or escrow company. Planning in advance and communicating clearly with the closing team ensures that the closing statement accurately reflects the intended disbursements.
When Investors Can Take Cash
Investors can receive cash at closing only if it is routed directly to them. Once proceeds are in the QI account, they are reserved for acquiring replacement property and cannot be withdrawn without ending the Exchange.
Standard 1031 Exchange timing rules still apply. Investors have 45 days to identify replacement property and 180 days to close. Taking cash does not extend these deadlines, so timing must be factored into planning.
Common Mistakes to Avoid
- Waiting too long to decide on cash distribution. Decisions must be made before closing.
- Routing all proceeds to the QI. Once deposited, funds cannot be withdrawn without canceling the Exchange.
- Miscommunication with the title company. Errors in disbursement can create unexpected tax consequences.
Tom Moore’s Tips for Success
- Discuss cash-out plans early with the Qualified Intermediary and title company.
- Be clear on which proceeds will go directly to the investor and which will be deposited with the QI.
- Understand that even modest cash distributions create taxable boot.
- Keep complete documentation of all instructions and closing statements.
- Work with a CPA or tax advisor to evaluate the tax impact and plan accordingly.
Tom Moore of Equity Advantage 1031 Exchange reminds investors that they do not have to reinvest every single dollar to use a 1031 Exchange effectively. Partial Exchanges are legitimate, increasingly common, and provide flexibility for those who want liquidity while deferring most of their tax liability. The key is to plan ahead, communicate clearly with the closing team and Qualified Intermediary, and involve tax professionals. With careful preparation, investors can balance cash needs and long-term tax deferral goals.
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.
