“Defer Some Capital Gain Taxes and Obtain Cash Now”
Although a 1031 tax deferred exchange allows an investor to defer 100% of their capital gain tax liability, some choose to only perform a partially deferred exchange.
In a partial exchange, the investor decides to defer some capital gain taxes and also recognize as gain by either 1) cash proceeds received or 2) a reduction on their replacement property debt – both of these events result in the receipt of “boot” which refers to any property received in an exchange that is not considered “like-kind.” [Cash boot refers to the receipt of cash. Mortgage boot is a term describing an Exchanger’s reduction in mortgage liabilities on a replacement property. Any personal property received is also considered boot in a real property exchange transaction.]
Cash proceeds can be received as follows:
If an Exchanger intends to perform an exchange that is fully tax deferred instead of partially deferred, they must meet two specific requirements:
If the boot is greater than the amount of the capital gain, then it’s not recommended to do an exchange.