Page 27 - AAGLA 2020-11
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 CAN I CASH-OUT A PORTION OF MY
1031 EXCHANGE PROCEEDS?
THE “INS-AND-OUTS” OF DOING A PARTIAL 1031 EXCHANGE
BY ORRIN BARROW
Many investors that come to Kay Properties are looking to fully defer any capital gains from the sale of their property by utilizing a like kind exchange or a Section 1031 Exchange. In order to obtain a full tax deferment under Internal Revenue Code (IRC) Section 1031, a seller would need to buy a replacement property for equal or greater value than the property being sold.
For example, if an investor sells their property for a net sales price of $1,000,000, in order to obtain full tax deferment of any resulting gain upon sale under IRC Section 1031, the investor must buy at least $1,000,000 worth of total real estate as replacement property. However, many investors are unaware that they are not fully obligated to use 100% of their proceeds in a 1031 Exchange. For example, if an investor sells an investment property for $1,000,000,
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they can receive and utilize $200,000 out of their exchange proceeds to increase their liquidity. In this example, the investor will only pay capital gains and depreciation recapture taxes on that $200,000 portion of their exchange, or in other words on just 20% of the total capital gains and depreciate recapture. The $200,000 would then be deducted from the amount the investor needs to reinvest in the exchange property, therefore, leaving the investor with a purchase of $800,000 in replacement property and still allowing the investor to defer the bulk of their taxes due.
Although, the $200,000 in cash that the investor received becomes taxable, it is now available to the investor and can be used for a variety of different purposes. Many investors have a large part of their net worth captured inside of their real estate holdings. They understand the value of a 1031 Exchange but still want the option of
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