Short answer: In a partial 1031 exchange, your taxable gain is the smaller of two numbers: your total realized gain or the boot you receive (cash, net debt relief and other non-like-kind property). The rest of the gain is deferred. Boot is taxed first as depreciation recapture at up to 25%, then as long-term capital gain.
Reviewed by Jon Hilley. Last updated September 29, 2026.
Yes, you can do a partial 1031 exchange. You do not have to defer everything: if you take some cash out or buy a less expensive replacement, you pay tax only on that portion, called boot, and defer the rest. Understanding boot in a 1031 exchange is the key to getting the math right.
There is no loophole here. It is simply how §1031(b) works: the exchange still qualifies, and the gain recognized is capped by the boot you received.
Key rules
- Partial exchanges are allowed: gain is recognized up to the amount of cash and other non-like-kind property received (IRC §1031(b)).
- Recognized gain is capped: you recognize the smaller of your realized gain or your boot (IRC §1031(b)).
- Debt relief counts as boot: mortgage paid off at the sale is treated as cash received, offset by new debt or added cash on the replacement (Treas. Reg. §1.1031(d)-2).
- Losses are not recognized: you cannot deduct a loss in a 1031 exchange, even a partial one (IRC §1031(c)).
- Basis adjusts: replacement basis equals old adjusted basis, minus cash received, plus gain recognized, plus extra cash paid (IRC §1031(d)).
How to calculate the gain step by step
- Amount realized: sale price minus selling expenses such as commissions, title fees and the QI fee.
- Realized gain: amount realized minus your adjusted basis (purchase price plus improvements minus depreciation).
- Boot: cash you keep, plus net debt relief, plus any other non-like-kind property received.
- Recognized gain: the smaller of step 2 or step 3.
- Deferred gain: realized gain minus recognized gain.
Exchange expenses paid from the proceeds, such as the QI fee, commissions and title charges, reduce your amount realized and the boot figure on Form 8824 line 15. Non-transaction costs do not.
Recognized gain is reported on Form 8824 (lines 15 through 24) and then flows to Form 4797 or Schedule D.
How the boot is taxed
Recognized gain is taxed first as unrecaptured §1250 gain, at a maximum 25%, up to the depreciation you claimed. Anything above that is long-term capital gain at 0%, 15% or 20%. The 3.8% net investment income tax (IRC §1411) and state tax may apply on top.
When a partial exchange defers nothing
If your boot equals or exceeds your realized gain, the whole gain is taxed and nothing is deferred. That can happen when you buy a much cheaper replacement or pay off a large mortgage without replacing the debt. The exchange still qualifies, but it saves you no tax.
When a partial exchange makes sense
A partial exchange is common when you want some cash for another purpose, when the right replacement costs less than your sale price, or when you are scaling down. You still defer most of the gain, and you pay tax only on the part you choose to take. The partial 1031 exchange rules are otherwise the same as for a full exchange, including the 45-day and 180-day deadlines.
If you are only slightly short of full reinvestment, a small Delaware statutory trust interest identified as a second replacement property can absorb the leftover cash. If you want cash but not tax, some investors defer the full gain and later refinance the replacement property. Loan proceeds are not taxable income, but a refinance arranged as part of the exchange can be treated as taking cash out, so plan the timing with your CPA.
Example: taking $150,000 of cash out
- Sale price: $1,000,000
- Selling expenses: $50,000
- Amount realized: $950,000
- Adjusted basis: $450,000 ($650,000 cost minus $200,000 depreciation)
- Realized gain: $500,000
- Mortgage: none
- Replacement property price: $800,000, paid entirely from exchange funds
- Cash boot: $150,000
- Recognized gain: $150,000 (smaller of $500,000 and $150,000)
- Deferred gain: $350,000
- Tax at 25% (all within prior depreciation): $37,500
- Net investment income tax at 3.8%: $5,700
- Total federal tax: $43,200
- Replacement basis: $450,000 ($800,000 minus $350,000 deferred gain)
Assumptions: the full 25% rate applies to the depreciation portion, the 3.8% net investment income tax applies, and state tax is not included. Because the $150,000 of boot is less than the $200,000 of depreciation, every dollar is taxed at the 25% rate. If the same investor bought a $600,000 replacement instead, boot would be $350,000: $200,000 taxed at 25% ($50,000), $150,000 at 15% ($22,500), plus $13,300 of net investment income tax, for $85,800 in total.
Try your own numbers with our partial 1031 exchange calculator.
Other questions investors ask
Is a partial 1031 exchange worth it?
Usually, when the boot is small compared with your total gain. You pay tax only on the cash or debt relief you keep and defer the rest, so a partial exchange can still shelter most of the gain. It is not worth it when the boot is close to or above your realized gain, because little or nothing is deferred.
What are the rules for a partial 1031 exchange?
The same rules as a full exchange: like-kind real property held for investment or business, a qualified intermediary holding the proceeds, identification within 45 days and closing within 180 days. The difference is that you receive some boot and are taxed on the smaller of that boot or your realized gain (IRC §1031(b)).
Is it better to pay capital gains tax or do a 1031 exchange?
It depends on what you want the money to do. If you plan to stay in real estate, deferring keeps more equity working; if you need the cash or want out, paying the tax may be simpler. Our capital gains vs 1031 comparison shows both side by side.
Common mistakes
- Asking for cash mid-exchange: once funds are with the QI, the regulations generally keep them there until the exchange ends. If you want cash out, we see it done most cleanly at the sale closing, before funds reach the QI.
- Forgetting the mortgage: the most common error we see is investors who reinvest all their cash but take on less debt than they paid off, creating boot they did not expect.
- Paying non-closing costs from exchange funds: loan fees, prorated rents and security deposits paid with exchange money can add to boot.
- Assuming boot is taxed at 15%: it usually hits the 25% depreciation layer first. Talk to your CPA or tax attorney before deciding how much to take out.
Run the numbers: try our free Partial 1031 (Boot) Calculator.
