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A partial 1031 exchange defers only the gain you roll into like-kind real estate. Money or other non-like-kind property you receive is taxed, up to the gain you actually realized. This is an explanation of the mechanics, not tax advice. A qualified intermediary and a CPA should run your file before you list or buy.
By RentalAnalytics Editorial Team · Published September 28, 2026
The IRS states the rule on its like-kind exchange page. If you exchange business or investment real estate solely for like-kind real estate, you generally do not recognize gain or loss. If you also receive other property or money, you recognize gain to the extent of that other property and money, and you cannot recognize a loss. Timing and the worksheet sit in the Form 8824 instructions.
The exchange is partial when the whole deal does not move into like-kind real property. The piece that comes out is boot.
Investors usually create it in one of three ways. They buy a cheaper replacement and take the leftover cash. They keep a check at closing. Or they pay off more debt than they put on the new property and do not replace that debt with their own cash.
Since 2018, section 1031 applies to real property, not to personal or intangible property. Furniture sold with the building is not like-kind real estate. Property held primarily for sale does not qualify, and U.S. real property is not like-kind to real property outside the United States.
You recognize gain to the extent of the money and non-like-kind property received. You do not recognize more than the realized gain.
Form 8824 puts other property and money on one line and realized gain on another. Recognized gain is the smaller figure. Debt is netted. In the IRS example in the instructions, debt the other party takes on is not automatically boot if you take on as much or more debt yourself. Cash you receive can still be boot when the debt side is clean.
That netting is why a smaller new loan surprises people. You can leave without a cash-out check and still have mortgage boot if the old debt was larger than the new debt. Adding your own cash can offset the gap. A smaller loan without that cash can create the boot you meant to avoid.
Depreciation already taken can change the tax on the recognized slice. Form 8824 has a line for that math. Do not apply a flat percent from memory. State tax may not follow the federal deferral.
Here is an illustration, not a closing statement and not a tax bill. You sell for $500,000 and buy a replacement for $450,000. Cash left in the exchange comes back to you. That cash is money received. The price gap is value you did not roll into like-kind property. Form 8824 is the worksheet. Do not multiply the gap by a rate you found online.
A planned partial exchange and a failed exchange are different bills. Tax on planned boot covers the boot. A missed deadline can make the whole gain taxable.
The Form 8824 instructions state the deferred-exchange deadlines. Identify replacement property in writing within 45 days after you transfer the property you gave up. Receive it by the earlier of 180 days after that transfer or the due date of your return for that year, including extensions. If you receive the replacement inside the 45 days, the instructions treat identification as met.
Most investors use a qualified intermediary so they do not take the sale proceeds. The instructions treat a transfer through a QI as a like-kind exchange. If you miss the timing because of the QI, the deal generally will not qualify. Your agent, and a related party, cannot serve as the QI. A mental short list is not identification. The replacement needs a clear written description, delivered on time.
The QI fee is the charge for holding proceeds and preparing exchange documents. Get it in writing before you sign. Ask which closing costs the QI will pay from exchange funds. A payment that does not qualify can itself be treated as boot.
Carrying costs do not pause while you hunt the replacement. Taxes, insurance, utilities, association dues, and debt service keep running. If you buy before you sell, a reverse exchange can put both properties on your books. The Form 8824 instructions point to a qualified exchange accommodation arrangement for that path. Budget the overlap. It usually costs more than a forward exchange.
Inspection, appraisal, lender fees, title, and points are cash whether or not you defer the whole gain.
Cash you add to avoid mortgage boot has a cost. You can wire money in to protect the deferral and then face a payment the rent does not cover. Run income, expenses, and the new debt service in the cash flow analyzer before you identify.
Leftover dollars create unplanned boot. Prorated rent, a mishandled deposit, and a residual balance sent to you at the end can all be money received. Ask what happens to every dollar left in the account.
Give them the sale price, loan payoff, selling costs, replacement price, new loan, and any cash you want to keep. Ask for cash boot and debt-relief boot as separate lines, and which day starts the 45-day and 180-day clocks.
Then underwrite the replacement as a rental. If it works only because it soaks up boot, look at another property or accept a smaller deferral on purpose. Planned boot, with a number your CPA owns, is a choice. Accidental boot plus a payment the rent cannot carry gives the savings back in operations.
Related parties, a former primary home, and state tax can change the result. Nothing here replaces Form 8824.
No. A partial exchange defers the gain rolled into like-kind real property and recognizes gain on the boot. A missed deadline, or taking the proceeds yourself, can make the whole gain taxable.
Yes. If the old loan is larger than the new loan and you do not add cash, the debt relief can be boot. Have the QI run that math before you pick the loan.
No. Recognized gain is tied to boot and limited by realized gain. Basis, selling costs, and depreciation belong in the CPA's computation.
Ask that QI. Some expenses can be paid from those funds. Others are treated as money you received. Get the list before closing.
Only if it works as an investment. Match net operating income to the new debt service in the cash flow analyzer. A deferral is not worth a payment the rent cannot carry.
Use a qualified intermediary who is not your agent and not a related party. If you take the funds, you generally have receipt and the deferral fails.
Talk to a QI and a CPA before you rely on this. When you have the replacement price, loan, rent, taxes, and insurance, run them through the cash flow analyzer. Deferral is only useful if the property can carry the new payment.
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