Case Study: Partial 1031 Exchange

Partial 1031 Exchange - Residence and Investment Property
Sue (not her real name) is a divorced nanny earning $22,000 a year. She has boarders to make ends meet. Sue's neighbor had just sold her five acre property to a developer for $500,000. The developer was offering Sue $650,000 for her five acres. Because Sue purchased the property for $66,000 (her cost basis in the property) Sue could have owed as much as $116,000 in capital gains taxes. Sue wanted to buy another large home on at least five acres in an area where it would only cost her around $250,000. Because this property represented the majority of her retirement funds, Sue also wanted to purchase a quality rental income property.

Sue bought both properties and deferred all the capital gains taxes by allocating the sale split 40/60 between a primary residence and a like-kind exchange into the investment property. Her residence portion of the sale amounted to 40% of the $650,000 ($260,000). She was able to account for this on her tax return by using her $250,000 primary residence exemption on taxes, available since 1997. The remaining 60% of the $650,000 ($390,000) was allocated to her new 1031 income property providing her with $30,000 in income per year for her retirement.

Notes About Partial 1031 Exchanges: Many exchanges are completed as "partial exchanges" where the taxpayer elects to treat the portions of the sale differently, according to their situation. An exchange can also be a great time to utilize some other investment losses that have been being carried forward and exchange the remainder.

Additional case studies:
[Moving into Investment Property] [Minimum Period to Own Exchanged Property]

Talk to an exchange facilitator today for specific answers about your situation.