1031 Tax Deferred Exchange

Registry
Order Service
Service List
Service Areas
Comparative
Escrow Officer
Calendar
Life of Escrow
Service Provider
1031 Tax

1031 Tax Deferred Exchange - Section 7 of 7

<<Back to Summary

How can you structure a transaction that in part is a sale and in part is an exchange? Sometimes you want only part of the sale of your relinquished property to be structured as an exchange and the rest as a cash sale, since you want to receive cash immediately. The tax regulations do not tell you how to do this.

One possibility is that you set your sale up as a single transaction, so that all of the cash from the resale of your property goes to your qualified intermediary. Then, it is important that you not receive any of the cash from the resale of your relinquished property until the end of the exchange transaction. All of your gain is allocated to the cash sale portion of the transaction if you use this format. The result is that you usually pay tax on 100% of all of the cash that you receive.

Some taxpayers try to divide their sale into two parts. They set up part of their sale as an exchange with a qualified intermediary. They set up the other part of their sale as a cash sale to their buyer that does not use a qualified intermediary. They will exchange a percentage of their relinquished property in the exchange part and will sell a percentage of their relinquished property in the sale part.

No one is quite sure how the tax laws work where you use this part sale/part exchange approach. It has major tax advantages, however, if it works as intended. Part of your tax investment in your relinquished property (or tax basis) will be allocated to each part of the deal.

Part of your tax basis will be allocated to the exchange part; your remaining tax basis will be allocated to the sale part. The tax basis that is allocated to the exchange part will become tax basis in your replacement property. The tax basis that is allocated to the sale part will reduce your tax on the cash that you get in the sale part.

You should be particularly careful to consult with your tax advisor and make sure that you understand the tax risks if you decide to use a part sale/part exchange approach.

<<Back