A Sec­tion 1031 exchange does not nec­es­sar­i­ly have to result in 100% tax defer­ral.

An investor may inten­tion­al­ly com­plete a par­tial exchange by acquir­ing qual­i­fy­ing replace­ment prop­er­ty while receiv­ing some cash or oth­er non-like-kind prop­er­ty.

For exam­ple, an investor may want to:

• Keep part of the sale pro­ceeds
• Reduce real estate expo­sure
• Cre­ate addi­tion­al liq­uid­i­ty
• Pur­chase replace­ment prop­er­ty of a low­er val­ue

In an oth­er­wise qual­i­fy­ing exchange, receiv­ing mon­ey or non-like-kind prop­er­ty gen­er­al­ly cre­ates rec­og­nized gain to the extent required by the tax rules.

Why Consider a Partial Exchange?

Full tax defer­ral is not always the investor’s pri­ma­ry objec­tive. Some­times pay­ing tax on part of the gain may pro­vide greater liq­uid­i­ty or allow the investor to make a bet­ter over­all cap­i­tal-allo­ca­tion deci­sion.

Key Point: A 1031 exchange should not be viewed as an all-or-noth­ing deci­sion. Par­tial tax defer­ral may be appro­pri­ate depend­ing on the investor’s objec­tives and tax cir­cum­stances.

Ref­er­ence Sources

• IRS — Sales, Trades, Exchanges FAQ

Impor­tant: This mate­r­i­al is for edu­ca­tion­al pur­pos­es only and is not tax, legal, account­ing, or invest­ment advice. Sec­tion 1031 out­comes depend on the tax­pay­er’s facts and com­pli­ance with applic­a­ble require­ments.