Can You Take Cash Out of a 1031 Exchange? Yes — Here’s What It Costs You

A plain-language guide to partial 1031 exchanges — and where a DST can fit in.

Dave’s Situation

Dave sold an investment property for $1 million. He wanted to defer as much tax as possible with a 1031 exchange — but he also needed $200,000 in cash for a business opportunity that couldn’t wait. He assumed those two goals were in conflict, that a 1031 exchange meant reinvesting everything or doing nothing.

It doesn’t have to be all or nothing. Dave could reinvest $800,000 into replacement property and defer the tax on that portion, while taking the remaining $200,000 in cash and paying tax on it. That’s a partial 1031 exchange, and it’s a more common request than most investors realize.

The Short Answer

Yes, you can take cash out of a 1031 exchange. The portion you reinvest into replacement property can still defer capital gains tax. The portion you keep as cash — referred to as “boot” — is generally taxable in the year of the sale. A partial exchange isn’t a workaround or a gray area; it’s a standard, well-established use of Section 1031.

How the Math Works

The core rule is the same as a full exchange: to defer all of your gain, the replacement property generally needs to be of equal or greater value than the property you sold, and you generally need to reinvest all of the proceeds. Any gap between what you sold and what you reinvest is boot, and boot is generally taxable to the extent of your gain.

For example: if you sell a property for $1 million and buy a replacement for $750,000, the $250,000 difference is boot. You’d owe tax on that $250,000, while the $750,000 you reinvested continues to defer tax.

Two Kinds of Boot

Cash boot is the more obvious kind — it’s simply the cash you keep instead of reinvesting.

Mortgage boot is easier to trip over by accident. If you had debt on the property you sold and take on less debt on the replacement property, that reduction in debt is generally treated as boot, even if you never touched a dollar of cash. This catches people off guard: they reinvest all their cash proceeds, assume they’ve done a full exchange, and are surprised to owe tax anyway because their new mortgage is smaller than their old one.

There are generally two ways to avoid mortgage boot. One is contributing additional cash to the replacement property purchase, effectively replacing the reduced debt with new equity. The other is simply taking on a larger mortgage on the replacement property — as long as the new property’s value and the new debt are each equal to or greater than what you had before, the debt side of the equation is satisfied without needing extra cash at all. Dave, for example, could replace his old $200,000 mortgage with a new $250,000 mortgage on his replacement property instead of writing a bigger check — either path gets him to the same result. Whether either approach makes sense depends on the numbers and the investor’s broader plans, and it’s worth working through with a tax advisor before deciding.

Where a DST Can Make This Easier

Partial exchanges run into a practical problem that has nothing to do with tax law: whole properties come in fixed price tags. If Dave wants to reinvest exactly $800,000, finding a single available property priced at exactly that amount — in the location and property type he wants, on his timeline, isn’t that easy.

A DST doesn’t have that constraint. Because DST offerings are typically structured to accept investments in increments — an investor doing a partial exchange can often size their reinvestment to the dollar, rather than rounding up or down to match whatever property happens to be available.

Going back to Dave: instead of searching for one property priced at exactly $800,000, he could put $500,000 into one DST offering and $300,000 into another, landing on the exact number he needs to defer the tax he wants to defer — without hunting for a single property that happens to match his target, and picking up some additional diversification along the way if that’s something he wants.

The Clock Doesn’t Change

A partial exchange follows the same timeline as a full one: 45 days from the closing of the relinquished property to identify replacement property in writing, and 180 days total to close on it. Taking some proceeds as cash doesn’t extend either deadline or create a separate timeline for the boot portion — the whole transaction runs on one clock.

Is a Partial Exchange Right for You?

That depends on why you need the cash and what the tax cost would be in your particular situation. If you have significant depreciation or a large amount of built-in gain, the taxable portion of the transaction may be more than you expect. There is no simple rule that applies to everyone, because the tax impact depends on your individual circumstances. That is why it is important to run the numbers with your tax advisor before deciding whether a partial exchange makes sense for you.

The Bottom Line

A 1031 exchange doesn’t have to be all-or-nothing. If you need liquidity alongside tax deferral, a partial exchange lets you have both — at the cost of paying tax on whatever you don’t reinvest. Understanding boot, and planning for it, is what separates an investor who makes an informed trade-off from one who’s surprised by a tax bill they didn’t expect.

This is exactly the kind of decision worth mapping out with your tax advisor before you sell, not after — the numbers depend heavily on your specific cost basis and depreciation history.

This article is provided for general educational purposes only and does not constitute tax, legal, or investment advice. The tax treatment of a partial 1031 exchange depends on your specific facts and circumstances, including cost basis and depreciation history. DST investments involve risk, including illiquidity and potential loss of principal, and are suitable only for accredited investors. Consult your tax advisor before making any exchange decisions.