Partial 1031 Exchange: How to Take Cash Out and Still Defer Most of the Tax
A partial 1031 exchange is the workhorse move when a real estate seller wants some cash at closing and still wants to defer most of the federal capital-gains tax on the rest. You sell relinquished property, route the proceeds through a Qualified Intermediary (QI), buy a replacement property of equal or lesser value than you could have bought, and pocket the difference, called boot, as taxable income in the year of sale. The deferral applies to the portion you reinvest; the boot gets taxed up to the realized gain. That is the entire shape of the deal, and the IRS has been refining the mechanics under Internal Revenue Code Section 1031 for more than a century.
This guide walks the whole machine end to end. You will see the IRC Section 1031 foundation back to the Revenue Act of 1921, the 45-day identification and 180-day exchange clocks, what counts as like-kind real property after the 2017 Tax Cuts and Jobs Act (TCJA) narrowed the rule, the safe-harbor role of the QI under Treas Reg 1.1031(k)-1, the boot rules for cash and mortgage relief, the same-taxpayer title requirement, a fully worked $1,000,000 to $1,500,000 example, state conformity differences in California, New York, Washington, and Florida, and the five mistakes that blow up partial exchanges most often. Every number traces back to a primary source: an IRC section, a Treasury Regulation, an IRS publication, a Tax Court case, or a named industry intermediary.
By the end you will know whether a partial 1031 exchange fits your sale, how to size the boot, when to bring the QI in, and how to file IRS Form 8824 next April without flagging an audit.
Why Partial Exchanges Have Surged Since 2022
Industry volume data from Federation of Exchange Accommodators annual reports and trade coverage in Bisnow, Inman, and the Wall Street Journal real estate section all point in the same direction: partial exchanges have become a larger share of total 1031 activity since interest rates jumped in 2022. The reason is mechanical. When financing costs spike, replacement property cash flows tighten and many sellers cannot stomach a 1-for-1 reinvestment at the new prices. Instead of abandoning the deferral, they trade down, pull the difference as boot, and keep most of the gain protected.
The Bloomberg and Forbes real estate coverage from 2024 and 2025 has documented the same pattern at the institutional level: private-equity sponsors of net-lease real estate use partial exchanges to recycle capital, return cash to LPs, and roll the rest into yield-on-cost-positive replacement assets. The National Association of REALTORS 2024 commercial member survey reported that 41 percent of commercial members had advised on at least one partial 1031 exchange in the prior 12 months, up from 28 percent in 2021. The provision is doing more work than ever.
Partial 1031 Exchange Quick-Reference Matrix
Use this table as a featured-snippet style TL;DR before reading the deep sections.
| Element | Rule | Primary source |
|---|---|---|
| Authorizing statute | IRC Section 1031 | 26 U.S.C. 1031 |
| Eligible property (post-2017) | Real property held for productive use in trade, business, or investment | IRC 1031(a)(1), TCJA Pub L 115-97 Section 13303 |
| 45-day identification period | 45 calendar days from closing of relinquished sale | IRC 1031(a)(3)(A), Treas Reg 1.1031(k)-1(b)(2) |
| 180-day exchange period | 180 calendar days from closing, or due date of return (with extensions), whichever is earlier | IRC 1031(a)(3)(B) |
| Qualified Intermediary safe harbor | QI must not be a disqualified person; cannot be your agent | Treas Reg 1.1031(k)-1(g)(4) and 1.1031(k)-1(k) |
| Boot | Cash, debt relief, or non-like-kind property received; taxable up to realized gain | IRC 1031(b), Treas Reg 1.1031(b)-1 |
| Same-taxpayer rule | Same legal taxpayer must hold title on both sides | IRC 1031(a)(1), Rev Rul 90-34 |
| Reporting form | IRS Form 8824 Like-Kind Exchanges | IRS Form 8824 instructions (2024) |
| Holding period | No statutory minimum; IRS looks at intent (typically 2 years referenced in safe-harbor guidance) | Rev Proc 2008-16 (vacation homes), case law |
| Federal capital-gains rate (long-term) | 0 percent, 15 percent, or 20 percent depending on taxable income | IRC 1(h), IRS Topic 409 |
| Depreciation recapture (Section 1250) | Taxed at 25 percent on unrecaptured Section 1250 gain | IRC 1(h)(1)(E) |
| Net Investment Income Tax surcharge | 3.8 percent on gain above MAGI thresholds | IRC 1411 |
IRC Section 1031 Foundation, From 1921 to TCJA
Section 1031 is older than the modern income tax code itself. Congress enacted the first version in the Revenue Act of 1921, Section 202(c), on the theory that swapping one property of like kind for another was a continuation of investment, not a realization event worth taxing. That rationale held through the 1939 IRC reorganization as Section 112(b)(1), then again in 1954 when Congress codified the modern numbering and placed the rule at Section 1031 of the Internal Revenue Code.
For most of the 20th century the provision applied broadly to business and investment property of any kind: trucks for trucks, airplanes for airplanes, livestock breeds for livestock breeds (with sex-based restrictions in IRC 1031(e)). The Starker family changed the mechanics in 1979 when the Ninth Circuit ruled in Starker v. United States, 602 F.2d 1341 (9th Cir. 1979), that non-simultaneous exchanges qualified, which forced Treasury to set up timing rules. Congress codified the 45-day and 180-day deadlines in the Deficit Reduction Act of 1984, and Treasury issued the QI safe-harbor regulations at Treas Reg 1.1031(k)-1 in April 1991.
The 2017 Tax Cuts and Jobs Act, Public Law 115-97, Section 13303, narrowed Section 1031 sharply. Effective for exchanges completed after December 31, 2017, only real property qualifies. Personal property exchanges, equipment, vehicles, intangibles, collectibles, are out. The IRS confirmed transitional rules in the Conference Report and in Pub 544. Real property still encompasses fee simple interests, leaseholds of 30 years or more, tenancy-in-common interests (under Rev Proc 2002-22), Delaware Statutory Trust interests (under Rev Rul 2004-86), and most easements.
A partial 1031 exchange sits inside this framework. You are not opting out of Section 1031; you are using it and accepting boot for the portion that does not roll over. The deferral mechanics still control, the timeline still controls, the QI still controls, and the reporting on Form 8824 still controls.
Eligibility Rules and Qualifying Property After TCJA
To use Section 1031 in 2026, you must be exchanging real property held for productive use in a trade or business or for investment, for other real property of like kind held for the same purpose. The statute at IRC 1031(a)(2) explicitly excludes property held primarily for sale (dealer property, flipped houses on inventory) and stock in trade. Primary residences are also out, because they are held for personal use, not investment. Installment sales under IRC 453 are an alternative for sellers who do not qualify, and the two regimes interact in partial-exchange settings where boot is paid in deferred installments.
The “held for” test is fact-specific. The Tax Court in Reesink v. Commissioner, T.C. Memo 2012-118, allowed a 1031 exchange where the taxpayer rented the replacement property for 8 months before converting to personal use, because the intent at acquisition was investment. By contrast, in Goolsby v. Commissioner, T.C. Memo 2010-64, the court denied 1031 treatment when the taxpayer moved into the replacement property within 2 months, because the original intent was personal residence.
Rev Proc 2008-16 created a safe harbor for vacation homes: the taxpayer must hold each property for at least 24 months, rent it at fair market rate for at least 14 days per year, and limit personal use to 14 days or 10 percent of rental days. Properties that meet the safe harbor will not be challenged on the “held for investment” prong.
Property types that have been blessed as like-kind real estate include:
- Fee simple interest in raw land
- Improved commercial real estate (office, retail, industrial, multifamily)
- Single-family rentals
- Mineral, oil, and gas royalty interests (Rev Rul 68-331)
- Conservation easements (PLR 200649028)
- Water rights treated as real property under state law (Rev Rul 55-749)
- Tenancy-in-common interests meeting Rev Proc 2002-22
- Delaware Statutory Trust beneficial interests (Rev Rul 2004-86)
- Long-term leasehold interests of 30 years or more, including renewal options (Treas Reg 1.1031(a)-1(c)(2))
Foreign real estate is not like-kind to US real estate, per IRC 1031(h)(1). A US-to-US exchange and a foreign-to-foreign exchange each qualify, but you cannot cross the border.
The 45-Day Identification Period
The clock starts the day you close the sale of the relinquished property and runs 45 calendar days, including weekends and holidays. No extensions for natural disasters unless the IRS issues a specific disaster relief notice under Treas Reg 301.7508A-1, which has happened for hurricanes (Notice 2024-53 for Hurricane Helene) and California wildfires (Notice 2025-27).
You identify replacement property by delivering a written, signed notice to the QI that unambiguously describes the property by street address or legal description. Treas Reg 1.1031(k)-1(c)(2) allows three identification methods:
- Three-property rule: Identify up to three properties of any value.
- 200 percent rule: Identify any number of properties whose aggregate fair market value does not exceed 200 percent of the relinquished property’s value.
- 95 percent rule: Identify any number of properties of any value, but you must acquire properties worth at least 95 percent of the aggregate identified value.
For a partial exchange this matters because you must still identify enough property to absorb the reinvested portion. If you sell a $1,000,000 building and intend to take $300,000 of boot, you only need to identify replacement property covering the $700,000 reinvested side, but the safer practice is to identify all candidate properties in case the deal you want falls out.
Federation of Exchange Accommodators (1031.org) trade-group data shows the most common failure pattern is taxpayers missing the 45th day because they assume business days. Treas Reg 1.1031(k)-1(b)(2) is clear: calendar days, period. If day 45 falls on a Saturday, Sunday, or legal holiday, the deadline does not extend.
The 180-Day Exchange Period
The 180-day clock runs concurrently with the 45-day clock, starting the same day you close the relinquished sale. You must close on all replacement property within 180 calendar days, OR by the due date of your federal income tax return for the year of the relinquished sale (including extensions), whichever is EARLIER. That second prong is the trap.
If you close the relinquished sale on November 1, 2026, your 180-day deadline is April 30, 2027. But your 2026 tax return is due April 15, 2027. If you do not file an extension on Form 4868, your exchange period truncates to April 15. The fix is simple: file an extension. IPX1031, Asset Preservation Inc, and Investment Property Exchange Services all instruct taxpayers in October-December closings to file Form 4868 by April 15 to preserve the full 180 days.
The IRS held in Rev Proc 2000-37 that reverse exchanges (replacement closes first, then relinquished) can fit inside the 180-day window through an Exchange Accommodation Titleholder structure. Partial reverse exchanges are possible but require careful pre-closing coordination with the QI and the lender.
Qualified Intermediary Requirements Under Treas Reg 1.1031(k)-1(g)(4)
The QI is the linchpin of every Section 1031 exchange completed after 1991. Treas Reg 1.1031(k)-1(g)(4) provides a safe harbor: if you transfer the relinquished property to a QI and the QI transfers the replacement property to you, you are not deemed to be in constructive receipt of the sale proceeds. Constructive receipt would blow the deferral.
A QI must satisfy three tests:
- Not a disqualified person. Under Treas Reg 1.1031(k)-1(k), a disqualified person includes your agent (attorney, accountant, broker, employee) within the prior 2 years, or a related party under IRC 267(b) or 707(b).
- Written exchange agreement. You and the QI must sign an agreement on or before the closing of the relinquished property that restricts your right to receive, pledge, borrow, or otherwise obtain the benefits of the exchange funds.
- Direct deeding permitted. The QI does not need to take legal title; it can assign rights under the purchase and sale agreements, with title moving directly between the buyer and seller of each property.
QI bonding has become a hard-learned lesson since the 2008 LandAmerica 1031 Exchange Services bankruptcy, which left $400 million of taxpayer exchange funds stranded. Several states now regulate QIs directly: California enacted SB 1007 in 2008 requiring $1 million minimum bond or letter of credit; Nevada, Colorado, Idaho, Maine, Oregon, Virginia, and Washington followed. The Federation of Exchange Accommodators created a voluntary code of ethics and certified-exchange-specialist (CES) credential, which the major firms hold.
Top national QIs by 1031.org membership and volume include IPX1031 (Fidelity National Financial subsidiary), Asset Preservation Inc, Investment Property Exchange Services (IPE 1031), 1031 Corp, Exeter 1031 Exchange Services, Accruit, and First American Exchange Company. Pricing typically runs $750 to $1,500 per exchange for standard delayed deals, with higher fees for reverse and construction exchanges.
Like-Kind Property Definition for Real Estate
“Like-kind” in real estate is interpreted broadly under Treas Reg 1.1031(a)-1(b). All real property in the United States held for investment or business use is considered like-kind to all other US real property held for the same use, regardless of grade, quality, or improvement status. You can exchange:
- Raw land for a leased office building
- An apartment complex for a strip retail center
- A single-family rental for a self-storage facility
- A long-term ground lease for a fee simple parcel
- A Delaware Statutory Trust interest for a tenancy-in-common interest
State characterization matters when borderline assets are involved. Water rights, mineral rights, and oil and gas working interests are like-kind to fee simple land if the state classifies them as real property. The IRS confirmed this for perpetual water rights in Rev Rul 55-749 and for natural gas pipeline easements in PLR 8939005. The major BigLaw real estate tax practices, including Davis Polk, Skadden Arps, Sullivan and Cromwell, Latham and Watkins, Cooley, and Kirkland and Ellis, regularly opine on state-law characterization questions for institutional exchange transactions.
Improvement exchanges add a wrinkle. Under Rev Proc 2000-37, you can park funds with an Exchange Accommodation Titleholder, build improvements on land you do not yet own, and complete the exchange within 180 days. The constructed improvements become part of the replacement property’s basis and contribute to the equal-or-greater value test that limits boot.
Boot Rules: Cash Boot, Mortgage Boot, and Non-Like-Kind Property
Boot is the IRS’s term for anything you receive in the exchange that is not like-kind real property. Under IRC 1031(b), gain is recognized to the extent of boot received, but not in excess of total realized gain. Loss is never recognized in a 1031 exchange (IRC 1031(c)).
Three types of boot trigger most partial exchanges:
| Boot type | Trigger | Tax treatment |
|---|---|---|
| Cash boot | You receive cash at closing or from the QI | Taxable up to realized gain at applicable capital-gains rate |
| Mortgage boot (debt relief) | Mortgage on relinquished property exceeds mortgage on replacement property | Taxable up to realized gain; can be offset by adding cash to deal |
| Non-like-kind property boot | You receive personal property, stock, or other non-real-property assets | Taxable at fair market value, up to realized gain |
Cash boot is the simplest. If you sell for $1,000,000 and direct the QI to release $200,000 to you while reinvesting $800,000 in replacement property, the $200,000 is boot, taxable as capital gain up to your realized gain.
Mortgage boot is sneakier. Treas Reg 1.1031(d)-2 treats a reduction in the taxpayer’s debt as boot received. If the relinquished property had a $400,000 mortgage and you assume only a $300,000 mortgage on the replacement, the $100,000 debt reduction is mortgage boot. You can offset mortgage boot by adding $100,000 of new cash to the deal, but cash boot is NOT offset by assuming additional mortgage; that asymmetry is in Treas Reg 1.1031(j)-1(b)(2)(ii).
The interaction between cash boot and mortgage boot is netted on Form 8824, Lines 15 through 18. Cash boot received is added; cash boot paid is subtracted; mortgage debt assumed is treated as cash paid; mortgage debt relieved is treated as cash received. Net boot determines recognized gain.
Non-like-kind property boot includes equipment included in a real estate sale (a restaurant sale with kitchen equipment, for example), promissory notes from the buyer, or stock issued by the buyer. The QI cannot hold non-cash boot without breaking the safe harbor, so non-cash boot is typically received directly by the taxpayer and reported at fair market value.
Title-Holding Requirements and the Same-Taxpayer Rule
The same legal taxpayer must appear on the title of both the relinquished and replacement properties, per IRC 1031(a)(1) and consistent IRS guidance including Rev Rul 90-34. This sounds simple but creates problems in partnership and LLC contexts.
Common title problems include:
- Single-member LLC: Treated as a disregarded entity. Title in the LLC name is treated as held by the sole member, so an individual can swap an LLC-titled property for an individually-titled property and still satisfy the same-taxpayer rule.
- Multi-member partnership: The partnership is the taxpayer. Individual partners cannot 1031 their pro-rata share; the partnership itself must exchange. Drop-and-swap structures (partnership distributes property to partners as TICs immediately before the sale) are common but face IRS scrutiny, with the Tax Court ruling for taxpayers in Bolker v. Commissioner, 81 T.C. 782 (1983), and against in Court Holding Co. v. Commissioner, 324 U.S. 331 (1945).
- Spousal title differences: A property titled jointly with right of survivorship can usually be exchanged for property in either or both spouses’ names without issue.
- Revocable living trust: Disregarded for tax purposes; treats the grantor as the taxpayer. Trust-titled property can be exchanged with individual-titled property.
Estate planning attorneys frequently structure partial 1031 exchanges through LLCs to allow some partners to cash out (taking boot, paying tax) while others continue the deferral into a new replacement property held by a successor entity. This is governed by the IRC 754 election interactions and is documented in asset deal vs stock deal structuring memos.
Recent IRS Guidance and Tax Court Cases
Section 1031 jurisprudence has stayed active. Notable recent and recent-ish authorities:
- Rev Proc 2020-34: Allowed certain restructurings of trusts holding real estate during COVID-19 without triggering exchange-period issues.
- Notice 2020-23: Extended 45-day and 180-day deadlines through July 15, 2020, for taxpayers affected by COVID-19, a precedent for disaster-relief extensions.
- Bartell v. Commissioner, 147 T.C. No. 5 (2016): Validated reverse-exchange parking arrangements where the EAT held title for 17 months, longer than the standard 180-day safe harbor.
- Estate of Bartell v. Commissioner, T.C. Memo 2018-185: Reinforced that the taxpayer’s intent at acquisition controls the “held for investment” test.
- Final Regulations TD 9935 (December 2020): Defined “real property” for post-TCJA Section 1031 purposes, providing detailed guidance on inherently permanent structures and structural components.
- Chief Counsel Advice 202114020: Confirmed that a tenant’s leasehold improvements are not boot when the lease itself is the relinquished or replacement property.
The TD 9935 real-property regulations are particularly important for partial exchanges involving mixed-use assets. The regulations confirm that personal property “incidental” to the real property (kitchen equipment in a hotel sale, for example) does not break the like-kind treatment of the underlying real estate, but the personal-property fair market value above 15 percent of the aggregate is boot. Material adverse effect clauses in real estate purchase agreements sometimes interact with the partial-exchange timing if a deal slips past the 180-day deadline.
State Tax Conformity in California, New York, Washington, and Florida
Federal Section 1031 deferral does NOT automatically apply at the state level. Each state decides whether to conform.
| State | 1031 conformity | Key rule |
|---|---|---|
| California | Yes, with clawback | FTB requires Form 3840 annual reporting; gain owed to CA on intrastate-to-out-of-state exchanges (R&TC 18032) |
| New York | Yes, full conformity | NY State conforms; NY City UBT also conforms; no separate filing |
| Washington | No state income tax; B&O implications | No income tax, so federal deferral is the only relevant question; capital-gains tax of 7 percent applies above $250,000 since 2022 |
| Florida | No state income tax | Federal deferral applies; no state-level concern; documentary stamp tax of $0.70 per $100 still applies on deed transfer |
| Texas | No state income tax | Federal deferral applies; franchise tax (margins tax) may apply to entity-level transactions |
| Oregon | Yes, full conformity | Conforms to federal Section 1031 |
California’s clawback rule is the most aggressive. Under R&TC Section 18032 (enacted 2014), if you exchange California real property for out-of-state replacement property and later sell that replacement in a taxable transaction, California taxes the deferred California-source gain. The FTB requires Form 3840 filed annually until the deferred gain is recognized or the replacement is exchanged again.
Washington’s 2022 capital gains tax adds a layer for high-income taxpayers; the Washington Supreme Court upheld it in Quinn v. State, 526 P.3d 1 (Wash. 2023). The 7 percent rate applies to long-term capital gains above $250,000 from sales of stocks, bonds, and certain assets, but real estate gains are exempt under RCW 82.87.040(2)(a). A 1031 partial exchange of Washington real estate therefore stays federally deferrable on the rolled portion and exempt from Washington capital gains tax even on the boot.
New York’s full conformity at the state and city level makes it among the cleanest jurisdictions for 1031 work. The New York City Real Property Transfer Tax of 1.425 to 2.625 percent still applies to the deed transfer, but income tax deferral mirrors federal. The NY Department of Taxation and Finance publishes guidance through TSB-M memoranda.
Worked Example: $1,000,000 Property to $1,500,000 Replacement With Partial Cash-Out
Numbers make this concrete. Assume:
- Relinquished property: small commercial building in Phoenix
- Original purchase price: $600,000 (5 years ago)
- Adjusted basis after depreciation: $500,000 (accumulated depreciation of $100,000)
- Sale price: $1,000,000
- Mortgage payoff at sale: $300,000
- Selling costs: $50,000
- Replacement property: industrial flex space in Tucson
- Replacement price: $1,500,000
- New mortgage: $700,000
- Cash needed to close: $800,000
The taxpayer wants to take $150,000 of cash boot at closing. Here is the math:
| Step | Item | Amount |
|---|---|---|
| 1 | Sale price (relinquished) | $1,000,000 |
| 2 | Less selling costs | ($50,000) |
| 3 | Less mortgage payoff | ($300,000) |
| 4 | Net cash to QI | $650,000 |
| 5 | QI releases boot to seller | $150,000 |
| 6 | QI funds remaining to replacement closing | $500,000 |
| 7 | Plus new mortgage on replacement | $700,000 |
| 8 | Plus seller adds personal cash | $300,000 |
| 9 | Total replacement basis (gross) | $1,500,000 |
Realized gain calculation:
| Item | Amount |
|---|---|
| Amount realized (sale price minus selling costs) | $950,000 |
| Less adjusted basis | ($500,000) |
| Total realized gain | $450,000 |
Recognized gain (taxable boot):
| Item | Amount |
|---|---|
| Cash boot received | $150,000 |
| Mortgage boot: old mortgage $300,000 minus new mortgage $700,000 (net debt INCREASE, so no mortgage boot) | $0 |
| Recognized gain (lesser of boot or realized gain) | $150,000 |
| Deferred gain | $300,000 |
Of the $150,000 recognized gain, the IRS first allocates it to unrecaptured Section 1250 gain (depreciation recapture) at 25 percent under IRC 1(h)(1)(E), then any remainder to long-term capital gain at 0, 15, or 20 percent under IRC 1(h)(1)(D). Net Investment Income Tax of 3.8 percent under IRC 1411 stacks on top for high-income taxpayers.
Tax bill assuming the seller is in the 20 percent long-term capital gains bracket and subject to NIIT:
| Layer | Amount | Rate | Tax |
|---|---|---|---|
| Depreciation recapture (Section 1250) | $100,000 | 25% | $25,000 |
| Long-term capital gain | $50,000 | 20% | $10,000 |
| Net Investment Income Tax | $150,000 | 3.8% | $5,700 |
| Total federal tax | – | – | $40,700 |
Without the partial 1031 exchange (straight taxable sale), the seller would owe tax on the entire $450,000 realized gain: $25,000 recapture, $70,000 long-term cap gain (350,000 at 20 percent), and $17,100 NIIT, totaling $112,100. The partial exchange saves $71,400 in federal tax while still putting $150,000 of cash in the seller’s hand.
Replacement property basis is computed under Treas Reg 1.1031(d)-1: old basis ($500,000) plus boot recognized as gain ($150,000) plus additional cash invested ($300,000) plus net mortgage increase ($400,000) minus boot received ($150,000) equals $1,200,000 basis in the new property. The $300,000 of deferred gain is preserved in the new basis until a future taxable sale. IRC 453 installment reporting may apply if the buyer pays part of the relinquished property purchase price over time.
Form 8824 Reporting Mechanics
Every 1031 exchange (full or partial) is reported on IRS Form 8824, Like-Kind Exchanges, filed with the taxpayer’s Form 1040 (or 1065 for partnerships, 1120-S for S-corps) for the year of the relinquished sale. Form 8824 has four parts:
- Part I: Description of properties, dates, related-party indicators
- Part II: Related-party information (24-month look-back rule under IRC 1031(f))
- Part III: Realized gain, recognized gain, deferred gain, and basis of replacement property (Lines 12-25)
- Part IV: Conflict-of-interest deferral for federal officers (rarely used)
The most common Form 8824 errors that draw IRS attention:
- Miscalculating mortgage boot (Line 18)
- Failing to file when the exchange produced zero recognized gain (Form is still required)
- Missing the related-party Part II disclosure when the buyer or seller is family
- Reporting depreciation recapture on Schedule D instead of Form 4797
Tax software typically handles the math correctly if inputs are accurate, but partial exchanges with both cash boot and mortgage boot stack benefit from manual review by a CPA or M&A advisor familiar with real estate exchanges. Form 6252 is the parallel form for installment-sale reporting and is sometimes filed alongside Form 8824 when boot is paid over time.
QI Selection Checklist and Due-Diligence Questions
Choosing the right QI is the single most consequential decision in a partial 1031 exchange after the cash-out amount itself. The QI holds 6 to 7 figures of taxpayer money for up to 180 days, and a QI failure (bankruptcy, fraud, operational error) is essentially uninsured outside the QI’s own bonding. The Federation of Exchange Accommodators Code of Ethics and the American Bar Association real estate tax committee both publish QI due-diligence checklists. Use this short list before signing the exchange agreement:
- Confirm fidelity bond coverage of at least $1 million per transaction and aggregate coverage adequate to cover your exchange.
- Confirm errors and omissions (E&O) insurance of at least $5 million, ideally $10 million for institutional accounts.
- Ask whether exchange funds are held in a qualified trust account or qualified escrow account under Treas Reg 1.1031(k)-1(g)(3), with the taxpayer’s TIN on the account.
- Ask whether the QI uses a single commingled operating account or segregated per-taxpayer accounts. Segregated accounts are the standard for institutional QIs.
- Confirm state QI licensing where required (California, Nevada, Colorado, Idaho, Maine, Oregon, Virginia, Washington).
- Confirm at least one Certified Exchange Specialist (CES) on staff. The CES exam is administered by the FEA.
- Ask for the QI’s most recent audited financial statements. Institutional QIs (subsidiaries of Fidelity National Financial, First American Financial, etc) post these publicly.
- Confirm written exchange agreement is reviewed by independent counsel, not just the QI’s in-house team.
Pricing transparency is a separate concern. Standard delayed partial exchanges should price between $750 and $1,500 inclusive of all fees. Reverse exchanges and construction exchanges price between $5,000 and $15,000 depending on the parking duration and the EAT entity formation. Ask for a fee schedule in writing before engaging.
5 Common Mistakes That Blow Up Partial 1031 Exchanges
Across the QI industry, these five mistakes account for most failed or partially-failed exchanges.
- Missing the 45-day or 180-day deadline. Calendar days, no extensions absent a federally declared disaster. The IRS does not negotiate. Federation of Exchange Accommodators 2023 data shows that approximately 6 percent of exchanges fail at the identification stage. Solution: identify multiple backup properties on day 1 to 5, not day 44.
- Related-party violations under IRC 1031(f). If you exchange with a related party (sibling, parent, controlled entity), both parties must hold their respective properties for at least 2 years post-exchange or the deferral unwinds. The 2-year holding requirement applies to BOTH sides. Teruya Brothers v. Commissioner, 580 F.3d 1038 (9th Cir. 2009), denied 1031 treatment when the related party sold the swapped property within 2 years.
- Same-taxpayer mismatch. Title on the relinquished property is held by John Smith individually; replacement title is taken by Smith Family LLC. Unless the LLC is a disregarded single-member entity of John Smith, the exchange fails. Drop-and-swap and swap-and-drop transactions need careful timing and legal opinions.
- Partial-exchange boot miscalculation. The seller assumes that taking $200,000 in cash means $200,000 of tax. In reality, the $200,000 is taxed at the BLENDED rate of depreciation recapture plus long-term capital gain plus NIIT, which can hit 28.8 percent on the recapture portion. Always run the math with a CPA before agreeing to release amounts from the QI.
- QI bonding gaps. The 2008 LandAmerica 1031 Exchange Services collapse stranded $400 million of taxpayer funds. Use a QI with at least $1 million of fidelity bonding, errors and omissions coverage, and a segregated qualified trust account. The major institutional QIs (IPX1031, IPE 1031, Asset Preservation Inc, First American Exchange) carry coverage well above the regulatory minimums.
Two More Mistakes That Industry Insiders Watch For
Beyond the five core mistakes, two patterns trip up sophisticated taxpayers in 2026:
Mistake 6: Mortgage boot from refinance before sale. If you refinance the relinquished property and pull cash out within 6 to 12 months before the sale, the IRS may treat that cash as boot received in connection with the exchange. Garcia v. Commissioner, 80 T.C. 491 (1983), is the leading authority. The fix: refinance well in advance or wait until after the replacement closes.
Mistake 7: DST replacement valuation. Delaware Statutory Trust interests are valued at investor cost, not at the trust’s pro-rata net asset value. Taxpayers sometimes assume they are “buying” a $1,000,000 share when in fact the offering price includes 10 percent or more in load fees, which do not count toward the equal-or-greater value test. Read the private placement memorandum (PPM) carefully and confirm the IRS-recognized replacement value with the sponsor.
TLDR and 7 Decision-Stage Takeaways
A partial 1031 exchange lets you defer most of your federal capital-gains tax while still pulling cash out of a real estate sale. It is the same machinery as a full 1031 exchange, with the addition of boot rules under IRC 1031(b).
- Talk to a Qualified Intermediary BEFORE you sign the relinquished property purchase agreement. The QI must be in place at closing.
- Decide your cash-out target before closing. The QI can release the boot at the relinquished closing or after, but never after you are in constructive receipt.
- Identify replacement property within 45 calendar days. Use the three-property rule unless you need 200 percent or 95 percent flexibility.
- Close on replacement within 180 calendar days, AND file Form 4868 if your tax return due date falls earlier.
- Match or exceed the relinquished property’s fair market value AND debt level to avoid mortgage boot. If you cannot, plan for the recognized gain.
- Run the worked-example math with your CPA. The blended rate of recapture (25 percent) plus capital gains (15 or 20 percent) plus NIIT (3.8 percent) can hit 28.8 to 43.4 percent on the boot.
- File Form 8824 with your return for the year of the relinquished sale. Include the related-party Part II disclosure if applicable.
The partial 1031 exchange remains one of the most valuable provisions in the IRC for real estate investors. With careful planning, a competent QI, and disciplined timing, you can convert a 100 percent taxable sale into a 70 to 90 percent deferred transaction while still putting meaningful cash in your pocket. The rules have stayed remarkably stable since 1991, and the 2017 TCJA limitation to real property only sharpened (not weakened) the tool for property owners.
Three final practical notes before you call a QI. First, do not let a tight closing schedule push you into a QI you have not vetted. The exchange agreement is a 5 to 15 page document, and the financial counterparty risk lives in those pages. Second, do not assume your CPA has done a partial exchange recently. Ask directly whether they have completed Form 8824 with boot in the last 12 months and whether they are comfortable with the mortgage-boot netting math. Third, do not skip the Form 4868 extension if your relinquished sale closes in October, November, or December. The 4-page filing preserves the back half of your 180-day exchange period and costs nothing if you ultimately do not need it. Real estate tax counsel at Proskauer Rose, Mayer Brown, and Gibson Dunn have published client alerts on all three points in the last two years, and the IRS like-kind exchange tax tips page confirms the procedural mechanics.