Partial Tax Deferment in 1031 exchange refers to the ability to defer paying taxes on only a portion of the gain from the sale of an investment property. The remaining portion of the gain is taxed as ordinary income in the year of the sale.
Key-Takeaway
- Partial tax deferment allows the investor to defer paying taxes on a portion of the gain from the sale of an investment property.
- The remaining portion of the gain is taxed as ordinary income in the year of the sale.
- Partial tax deferment is an option available to investors who participate in a 1031 exchange.
Example
- Consider an investor who sells a rental property for $1 million, with a basis (original cost plus capital improvements) of $500,000. The investor has a taxable gain of $500,000 ($1 million sales price – $500,000 basis).
- Under a partial tax deferment in a 1031 exchange, the investor might choose to defer paying taxes on $300,000 of the gain, and pay taxes on the remaining $200,000 as ordinary income in the year of the sale.
Tips
- Consider working with a qualified intermediary and a tax advisor to determine the best strategy for your specific situation.
- Be aware of the deadlines and requirements for a 1031 exchange, as they can be strict and unforgiving.
Advice
- Consider the long-term implications of a partial tax deferment, including future tax liability and investment goals.
- Evaluate the financial benefits and drawbacks of partial tax deferment compared to other investment strategies.
Recommendations
- Consider the potential for partial tax deferment as a way to manage tax liability and maximize returns from your investment property.
- Take the time to understand the requirements and rules for 1031 exchanges and partial tax deferment, and seek professional guidance if necessary.
