1031 Boot at closing?

[Jack Sarcia]

Hello all,

To take some cash out of my proceeds at closing would be very helpful in paying off some debts. This is a 1031 Exchange.

Is it possible to take $10k and pay the tax due on that amount?

[Bill Exeter]

@Jack Sarcia 

Hi Jack,

Yes, there are essentially three (3) ways to do this.

1) You can pull the $10,000 cash out at the closing of your relinquished property (sale) transaction.  The $10,000 would be taxable (i.e. taxable boot) in the year of sale since you pulled the cash out at the closing.

2) You can leave all of the funds inside of your 1031 Exchange transaction and have them all sent to your Qualified Intermediary for deposit inside your 1031 Exchange account.  Make sure that you leave the $10,000 inside your 1031 Exchange account and do not use it toward any replacement property purchase.  You would then withdraw the $10,000 at the back end of your 1031 Exchange (after 180 days has passed).  This strategy MAY allow you to defer some of your capital gain into the following year depending on your circumstances (i.e. depending upon any depreciation recapture amounts).  You should have your accountant review this with your Qualified Intermediary to determine if there would be any benefit from this strategy.

3) You can leave all of the funds inside of your 1031 Exchange transaction and have them all sent to your Qualified Intermediary for deposit inside your 1031 Exchange account, and then use all of your 1031 Exchange funds toward the purchase of your replacement properties.  Once you have completed your 1031 Exchange, you can do a cash out refinance for the amount desired.  This cash out refi is a non-taxable event, but does create additional debt, so it depends on your goals and objectives.