Tax Deferral for Cash
Remainder ("Boot")

 

 

What if you want to undertake a 1031 exchange, but you want to put only part of the proceeds of the sale of your relinquished property, into replacement property? Will you be taxed on the cash that you don't re-invest in like-kind property that you identify within 45 days and acquire within 180 days?

Ask any 1031 intermediary, and they will tell you that you will be taxed on the cash (or "boot", as it's called) that is not re-invested in like-kind property within the time limits. As a result, you seem to have no choice: acquire property you don't really want at a price you don't really want to pay, or pay the tax.

To borrow a phrase, "It ain't necessarily so." In fact, it isn't so, if you do either of the following:

• Skip the 1031 exchange entirely and enter into a collateralized installment sale with S.Crow Collateral Corp., instead, or
• Direct your 1031 intermediary to sell your relinquished property to S.Crow Collateral Corp. as a collateralized installment sale, before it is re-sold by S.Crow Collateral Corp. to the ultimate buyer.

If you do either of those, the cash which you don't want to re-invest immediately or at all in like-kind property will be entitled to tax deferral under Section 453 of the Internal Revenue Code (the installment-reporting section), unburdened by the requirement of Section 1031 that lump-sum cash be taxed immediately.