Can You Reclaim Your Initial Down Payment in a 1031 Exchange?

If you are an investor preparing to sell one property and acquire another, one question you might be wondering about has to do with your original down payment on the property you plan to sell (the “relinquished property” in #1031 lingo). More specifically, you may be asking if it is possible to withdraw in cash an amount equal to your down payment and still achieve 100 percent tax-deferral on the capital gains.

Unfortunately, the IRS takes the position that any money taken out of the 1031 transactions is subject to immediate tax, no matter how it is earmarked. Of course, you are always free to extract cash from your 1031 exchange, but then you will be subject to immediate tax on every appreciated dollar you receive.

Since most investors want to defer all their tax exposure with a 1031 deal (and reinvest as much as possible), they usually wait until they ultimately sell outright to reclaim their initial investments.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.