Nothing in the 1031 rules says all-or-nothing. If you sell for $800,000 and only reinvest $700,000, the exchange is still valid — the $100,000 you kept is boot, taxed now, while the rest of your gain stays deferred.
When taking boot on purpose makes sense
- You need liquidity — tuition, another investment, a cash cushion — and you'd rather pay tax on one slice than the whole gain.
- You're deliberately deleveraging — trading down in size as you approach retirement while deferring most of the gain.
- You have losses to absorb it — capital losses or suspended passive losses elsewhere can offset the recognized gain, making the boot nearly free.
The two things to know before you dial it
First, the taxed slice is the expensive slice. Recognized gain comes out of your depreciation recapture first, at up to 25%, before any of it gets capital gains rates. Small boot, big rate.
Second, arrange cash boot at the right moment. The clean ways to receive cash are at your sale closing (before the rest goes to the intermediary) or from the intermediary after the exchange fully completes. Grabbing funds mid-exchange can jeopardize the whole structure — tell your intermediary up front how much you plan to keep.
Example
Profit of $350,000, including $100,000 of depreciation. You keep $60,000 of cash. Tax now: $60,000 × 25% = $15,000. Deferred: the other $290,000 of gain. You got your liquidity for an effective 25% toll on just the slice you touched.
Dial in your partial exchange →The boot calculator shows the tax at any cash-out amount