Partial 1031 exchange

[Matt Smith]

Can I do a partial 1031 exchange?

For example, I had $300K from the proceeds of the sale, and I want to reinvest only $200K in a new property. Does it mean I can still transfer $200K to the new property and be taxes only on $100K?

[Dave Foster]

@Matt SmithThat's exactly correct.  If you want to defer tax fully you must purchase at least as much as you sell.  But if you want to buy less and take some cash out you can.  Every dollar out the IRS will consider a dollar of gain and it will be taxable until you have taken out the full amount of your gain.

In your example if you had 150K in profit then you would pay tax on the 100K and still shelter the other 50K of profit.  However if you only had 100K in profit then you would pay tax on the 100K you take out of the 1031 and the 1031 wouldn't be of any benefit to you.

Still it can be a very good strategy if you're needing cash out or wanting to slowly reduce your exposure.  Another option if you're just wanting cash for some other use is to complete a full exchange as you describe - sell for 300K and buy for 300K and then immediately do a cash out refi for 100K. That cash is not taxable and you sheltered all of your gain through the 1031.