What makes an exchange partial
An exchange becomes partial whenever you receive cash, trade down in value, or reduce your mortgage balance — any amount not reinvested is "boot." Boot can be intentional (you want some cash out) or accidental (a price mismatch in the closing).
How boot is taxed
Boot is taxable up to your realized gain, even in an otherwise valid exchange. The IRS applies boot to the worst tax treatment first: depreciation recapture (up to 25%) is recognized before capital gains. If you have $80,000 in accumulated depreciation and take $50,000 in boot, the full $50,000 is taxed as recapture at up to 25% — not as the more favorable capital gains rate.
Calculating a partial exchange
Realized gain = net sale price − adjusted basis. Amount deferred = the lesser of (a) equity reinvested in the replacement or (b) the full realized gain. Boot = realized gain − amount deferred. Use the 1031 calculator to model the deferred and taxable portions before structuring the deal.
Frequently asked questions
Is boot always taxed as ordinary income?
No — boot is first allocated to depreciation recapture (up to 25%), then to capital gains (0–20%). The order makes a difference.
Can I intentionally take some boot?
Yes. You pay tax on the boot portion and defer the rest. It's a legitimate choice when you want partial liquidity.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS — Like-Kind Exchanges (Real Estate Tax Tips)
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.