Can You Do a Partial 1031 Exchange? Boot, Deadlines, and Basis

A partial 1031 exchange lets you defer tax on part of the gain from selling investment or business real estate while pulling some cash or equity out of the deal. You pay tax now on the portion you keep and defer tax on the portion you reinvest into a like-kind replacement property. Section 1031 of the Internal Revenue Code does not require an all-or-nothing swap: if your replacement property costs less than what you sold, or if you take some proceeds home, only that shortfall is taxable.¹

How the Partial Version Works

A full 1031 exchange defers your entire gain. To get there, you buy replacement real estate worth at least as much as what you sold and reinvest every dollar of net proceeds. A partial exchange loosens both requirements. You deliberately take some cash or equity out, accept the tax on that slice, and defer the rest.

The IRS treats the reinvested portion exactly like a full exchange. Every dollar that flows into the replacement property keeps its tax-deferred status. The portion you pull out becomes recognized gain. Section 1031(b) states the rule directly: when an exchange includes money or non-like-kind property alongside qualifying real estate, gain is recognized only up to the amount of that extra value received.¹

People choose a partial exchange for a variety of reasons: cash for renovations, a down payment on something outside the exchange, or simply the desire to harvest some profit while sheltering the bulk of the appreciation. The central decision is how much to pull out, because that number drives your tax bill for the year.

Cash Boot and Mortgage Boot

The tax code calls any non-like-kind value you receive “boot.” Boot is what makes a partial exchange partial, and it shows up in two forms.

Cash boot is the straightforward kind. If your relinquished property sells for $600,000 and you direct only $500,000 toward the replacement, the $100,000 you keep is cash boot. It becomes taxable recognized gain in the year of the exchange.

Mortgage boot is less obvious. It arises when the debt on your replacement property is lower than the debt paid off on the relinquished property. Under Section 1031(d), when a buyer assumes your old mortgage or it gets paid off at closing, that debt relief counts as money received.¹ A $300,000 mortgage paid off on the old property against a $200,000 mortgage on the new one produces $100,000 in mortgage boot.

The netting rules matter here, and they run one direction only. You can offset mortgage boot by adding more cash to the deal. Reduce debt by $50,000 and put an extra $50,000 of cash into the replacement, and the mortgage boot washes out. The reverse does not work. Taking on a bigger mortgage will not erase cash boot you received. That asymmetry catches people off guard and is worth remembering when you structure the deal.

One more limit: however much boot you receive, recognized gain can never exceed the total realized gain on the sale. If you profited $80,000 but received $100,000 in boot, you owe tax on $80,000, not $100,000.¹

What Tax Rates Apply to the Recognized Portion

Recognized gain in a partial exchange can face three separate layers of federal tax. Missing any of them can turn into an unwelcome surprise at filing time.

The first layer is depreciation recapture. If you claimed depreciation on the relinquished property, the IRS recaptures that portion first. Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%, higher than the standard long-term capital gains rate.² In a full exchange this tax is deferred with everything else, but once you receive boot, recognized gain absorbs depreciation recapture before any remaining gain is taxed at capital gains rates. For investors who have held property for many years with substantial accumulated depreciation, this 25% layer often represents the largest chunk of the tax bill.

The second layer is long-term capital gains tax. After depreciation recapture, remaining recognized gain is taxed at federal long-term capital gains rates of 0%, 15%, or 20%, depending on your total taxable income for the year. Most investors land in the 15% bracket; high earners hit 20%.³ For 2026, the 20% rate begins at $545,500 for single filers and $613,700 for married couples filing jointly.

The third layer is the Net Investment Income Tax. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), recognized gain is also subject to the 3.8% NIIT. These thresholds are not indexed for inflation, so more taxpayers cross them every year.⁴

Stack all three and the effective federal rate on boot can reach nearly 29% for high-income investors with heavily depreciated property. That changes the math on how much cash is worth pulling out of the exchange.

Working Out Your Reinvestment Number

Before deciding how much boot to take, pull three numbers from the sale of your relinquished property:

Net sale price: gross sale price minus qualifying closing costs such as broker commissions, title fees, and transfer taxes. This is the benchmark the IRS uses to judge whether your replacement property is of equal or greater value.
Mortgage payoff: the exact debt satisfied at closing. Match or exceed this liability on the replacement property to avoid mortgage boot.
Adjusted basis: original purchase price, plus improvements, minus all depreciation claimed. This determines how much gain you actually realized.

These figures appear on your closing settlement statement, and transactions still using the older HUD-1 format break every line item out on that document.⁵ You report the exchange to the IRS on Form 8824, which walks through realized gain, recognized gain, and deferred gain step by step.⁶

Expenses That Quietly Trigger Boot

Not every closing cost is exchange-friendly. If you pay non-exchange expenses out of the sale proceeds held by the intermediary, those payments count as cash boot even though no check ever reaches your hands. Common culprits include prorated property taxes, prorated rent credits to the buyer, loan origination fees, appraisal costs, and mortgage insurance premiums on the replacement property. Paying off a personal credit card or unrelated debt from the escrow account produces the same result.

Track every dollar leaving the exchange account. Qualified closing costs like broker commissions and title insurance reduce your net sale price without creating boot. Financing costs and proration adjustments do not get that treatment. A few thousand dollars in overlooked prorations can quietly convert a fully tax-free exchange into a partially taxable one.

The 45-Day and 180-Day Deadlines

The mechanics and timeline for a partial exchange match a full exchange. Two hard deadlines govern the process, and neither can be extended.¹

Day 45: written identification of replacement properties must reach your qualified intermediary.
Day 180: you must close on the replacement property. If your tax return is due before day 180, that earlier date controls, though filing an extension pushes the return deadline past the 180-day window for most taxpayers.

Miss either deadline and the entire exchange dies, making the full gain taxable. File a tax extension if your exchange straddles the April filing deadline.

The identification itself must follow one of three IRS rules. Under the three-property rule, you can name up to three replacement properties regardless of value; this is the most commonly used option. Under the 200% rule, you can identify any number of properties as long as their total fair market value does not exceed 200% of what you relinquished. The 95% rule saves an identification that busts both limits only if you actually acquire at least 95% of the aggregate value identified, which is difficult to meet in practice.

For a partial exchange, the identified properties can be worth less than what you sold since you are deliberately taking boot. The written identification simply has to reach the intermediary before the 45-day clock runs out. A late identification, even by one day, disqualifies the property from the exchange entirely.

The Qualified Intermediary Requirement

You cannot touch the sale proceeds at any point during the exchange. A qualified intermediary holds the funds between the sale and the purchase to prevent constructive receipt, which would blow up the deferral. The QI enters into a written agreement with you, receives the proceeds at closing, and later uses those funds to acquire the replacement property on your behalf.

Treasury regulations disqualify anyone who has served as your employee, attorney, accountant, investment banker, or real estate agent within the two years before the exchange from acting as your QI. The one exception is someone whose only prior work for you was facilitating a previous 1031 exchange, and routine bank or title company services do not create disqualification.⁷

In a partial exchange, the QI uses part of the proceeds to purchase the replacement property and holds the remainder. Once the exchange period ends or the replacement property closes, the QI distributes the leftover funds to you. That distribution is the taxable event. You report the recognized gain on Form 8824 with your return for that year.⁸

Basis in the Replacement Property

Your tax basis in the new property is not simply what you paid for it. The deferred gain gets baked into a lower basis, which means a larger taxable gain waits for you if you later sell without doing another exchange. The simplest way to think about it: basis in the replacement property equals its fair market value minus the amount of gain you deferred.

Take a concrete example. You sell a property with an adjusted basis of $200,000 for $500,000, realizing a $300,000 gain. You take $50,000 in cash boot and reinvest $450,000. You recognize $50,000 of gain and defer $250,000. Basis in the new property is $450,000 minus $250,000, or $200,000. That low basis carries the deferred gain forward, waiting to be taxed on a future sale unless you do another 1031 exchange or hold the property until death.

Getting this calculation wrong creates compounding errors on every future return, particularly for depreciation schedules. Your tax professional needs the completed Form 8824 to set up the replacement property’s depreciation correctly from day one.

Pitfalls That Enlarge the Tax Bill

Constructive Receipt

If you have the ability to access the sale proceeds at any point before the exchange closes, the IRS treats you as being in constructive receipt of the funds, disqualifying the exchange. The QI arrangement exists specifically to create a safe harbor against this. Your exchange agreement must explicitly restrict your right to receive, pledge, borrow against, or otherwise benefit from the funds during the exchange period. Any side agreement giving you access to the money, even temporarily, can destroy the deferral on the entire transaction.

QI Insolvency

Your exchange funds sit in the QI’s account for weeks or months. If the QI files for bankruptcy in that window, you could lose access to your money. Worse, the IRS’s position is that you may owe tax on the gain in the year of transfer even while the cash is frozen in bankruptcy proceedings, with any loss claim potentially delayed for years. Look for QIs that hold exchange funds in segregated, FDIC-insured accounts rather than commingled investment pools. Some states require this; many do not.

State Tax Treatment

Not every state fully conforms to the federal 1031 rules. Some impose their own reporting requirements, limit deferral amounts, or require extra documentation. If you sell in one state and buy in another, you may owe state tax in the state where the relinquished property was located even though the federal exchange qualifies for full or partial deferral. Check your state’s treatment before assuming federal deferral carries through to your state return.

Related-Party Exchanges

Under Section 1031(f), exchanges between related parties require both sides to hold their replacement properties for at least two years. If either party disposes of the property inside that window, the deferred gain snaps back and becomes taxable. Related parties include siblings, spouses, ancestors, lineal descendants, and entities where the taxpayer holds more than 50% ownership. Exceptions cover death, involuntary conversions like eminent domain, and situations where the taxpayer can show the exchange was not structured to avoid tax. If you are buying from or selling to anyone in that circle, build the two-year hold into your plan from the start.

Starting the Search Too Late

The 45-day and 180-day deadlines are statutory. No extensions, no reasonable-cause exceptions, no IRS discretion. Investors who begin looking for replacement properties after the sale closes often run out of time. Start identifying candidates before the relinquished property hits the market. The 45-day window is for formalizing your choice, not for beginning the search.

1
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
2
Internal Revenue Service. Treasury Decision 8836 – Unrecaptured Section 1250 Gain
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
5
Consumer Financial Protection Bureau. What Is a HUD-1 Settlement Statement?
6
Internal Revenue Service. About Form 8824, Like-Kind Exchanges
7
Internal Revenue Service. Revenue Procedure 2003-39 – Qualified Intermediary Safe Harbors
8
Internal Revenue Service. 2025 Instructions for Form 8824 – Like-Kind Exchanges