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Partial Tax Deferral
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Volume #2005, Issue #4 |
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Although a §1031 tax deferred exchange allows
an investor to defer 100% of their capital
gain tax liability, some choose to only perform
a partially deferred exchange.
WHAT IS A PARTIAL EXCHANGE?
In a partial exchange, the investor decides
to defer some capital gain taxes and also
recognize as a gain by either (1) cash proceeds
received or (2) a reduction on their replacement
property debt-both of these events result
in the receipt of "boot" which refers to any
property received in an exchange that is not
considered "like-kind." [Cash boot refers
to the receipt of cash. Mortgage boot is a
term describing an Exchanger's reduction in
mortgage liabilities on a replacement property.
Any personal property received is also considered
boot in a real property transaction.]
WHEN CAN CASH PROCEEDS BE RECEIVED?
Cash proceeds can be received as follows:
- When the Exchanger instructs
the closing officer to disperse a fixed
dollar amount of proceeds to them directly
from the relinquished property closing;
-or-
- After all identified
property have been purchased or after
the end of the exchange period, if there
are any properties which have been identified
but not purchased.
WHAT ARE THE REQUIREMENTS
FOR FULL TAX DEFERRAL IN AN EXCHANGE?
If an Exchanger intends to perform an exchange
that is fully tax deferred instead of partially
deferred, they must meet two specific requirements:
- Reinvest the entire net
equity (net proceeds) in one or more replacement
properties; -and-
- Acquire one or more replacement
properties with the same or a greater
amount of debt. [One exception to the
second requirement is that an Exchanger
can offset a reduction in debt by adding
cash to the replacement property closing.]
WHEN NOT TO DO AN
EXCHANGE
If the boot is greater than the amount of
the capital gain, then it is not recommended
to do an exchange.
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NCS Exchange
Professionals
4811 Hopyard Rd. Suite G-6
Pleasanton, CA 94588
1-866-USE-1031
www.ncs1031.com |
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