The Partial 1031 Exchange — Taking Cash Without Killing the Deal

Full deferral is the default goal, but life intervenes: tuition, debt payoff, a liquidity cushion. The partial exchange takes cash off the table deliberately and defers the rest — legitimate, common, and worth structuring rather than stumbling into. Background on the mechanics sits in the boot guide.

How the math splits

Whatever you don’t reinvest — cash kept, or purchase price below sale price — is boot, taxable up to your total gain. Sell at $1.6M with $700K of gain, buy at $1.3M, and the $300K difference is recognized now (recapture rates first, then capital gains); the remaining $400K of gain rides deferred into the new property’s basis. The deferral isn’t all-or-nothing — it’s proportional to discipline.

Structuring the cash-out

Two clean routes. Take the cash at the relinquished closing via your QI’s documented distribution — cleanest paper trail, tax recognized that year. Or buy down deliberately and receive the residual at exchange completion. What not to do: improvise mid-exchange, touch funds directly, or let prorations create accidental boot on top of the intentional kind. Tell your QI the plan in writing before closing one.

The refinance alternative

Often better: complete the full exchange into the replacement property, wait a respectable season, then cash-out refinance. Loan proceeds aren’t taxable income, deferral stays intact, and the interest may be deductible against the rent. The tradeoffs are real too — debt service, closing costs, rate risk — but for owners whose cash need isn’t urgent, borrow-after beats boot-now in most spreadsheets we run. Timing and intent documentation matter (an exchange-then-immediate-refi pattern invites scrutiny); your CPA sets the interval.