Introduction Not every investor wants to roll the entire proceeds of a real estate sale into a new property. Sometimes, you need some cash now—and that’s where partial 1031 exchanges and related alternatives come into play. This blog explores how you can use partial exchanges or hybrid strategies to combine immediate liquidity with long-term tax deferral.
What is a Partial 1031 Exchange? In a partial 1031 exchange, only part of the proceeds from the sale of a property are reinvested in like-kind property. The remaining balance—called “boot”—is taxed as capital gain.
Why Use a Partial Exchange?
- Immediate Cash Needs: Pay off debt, invest elsewhere, or fund retirement.
- Market Conditions: Buy a smaller replacement property in an uncertain market.
- Diversification: Reinvest part and keep part for flexibility.
Hybrid Alternatives to Consider
- Combination with DSTs: Use part of the proceeds to buy into a DST and retain some for cash flow.
- Installment Sales: Spread out gains on the non-exchanged portion.
- Opportunity Zones: Reinvest a portion of the gain in QOFs.
Tax Implications
- Boot received is taxable.
- IRS requires full disclosure of how proceeds are used.
- Ensure exchange portion meets all compliance rules to defer taxes on that portion.
Conclusion Partial exchanges and hybrids offer the best of both worlds—access to cash now and tax deferral on the rest. This approach requires precise planning and professional execution but offers flexibility unmatched by a traditional 1031.
