The short answer
A partial exchange is a like-kind exchange in which you also receive cash, other non-like-kind property or net relief from debt, so part of the gain is taxed and the rest is deferred. Under section 1031(b), recognized gain is the lesser of your realized gain or the money plus the fair market value of the other property, which is commonly called boot. Trading down in value, taking cash at closing and shedding more debt than you take on are the usual causes.
At a glance
| Gain taxed | The lesser of realized gain or boot received |
|---|---|
| Counts as boot | Cash, non-like-kind property, and net liabilities the other side assumes |
| Losses | Not recognized in a partial exchange |
| New basis | Old basis minus money received plus gain recognized |
The rule comes from section 1031(b), with debt relief treated as cash
Section 1031(b) says an exchange that would qualify but for the receipt of other property or money still qualifies, and gain is recognized only up to the money and the fair market value of the other property. Section 1031(c) bars recognition of any loss in the same situation.
Section 1031(d) treats a liability of yours assumed by the other party as money received. Reg. section 1.1031(d)-2 extends that to property transferred subject to a liability, and the Form 8824 instructions net liabilities you assume and cash you add against it.
Reg. section 1.1031(b)-1 gives the classic illustration: land bought for $5,000 is exchanged for land worth $6,000 plus $2,000 cash. The gain is $3,000, but only the $2,000 of cash is recognized.
Worked example: trading down by $150,000
Hypothetical: you sell a debt-free rental for $1,000,000 with an adjusted basis of $400,000, so your realized gain is $600,000. Ignoring costs, you buy a $850,000 replacement and the intermediary releases the remaining $150,000 to you after that closing.
Boot is $150,000, which is less than the $600,000 gain, so $150,000 is taxed and $450,000 is deferred. Your basis in the replacement is $400,000, less the $150,000 of money received, plus the $150,000 of gain recognized: $400,000. That equals the $850,000 price minus the $450,000 deferred gain.
How the $150,000 is taxed, between depreciation recapture and capital gain, is a separate question covered in whether boot is taxed as recapture first. These numbers are hypothetical; run your own with your CPA.
Where it bites: debt, leftover cash and personal property
Hypothetical: paying off a $300,000 mortgage at the sale and buying with a $200,000 loan leaves $100,000 of net debt relief that counts as boot unless you add $100,000 of your own cash to the purchase. See debt offset against cash taken out and the trading-down strategy.
Cash left with the intermediary after the last replacement closes is boot in the year you receive it; see leftover cash after an exchange. Under Reg. section 1.1031(k)-1(g)(6) it generally cannot be released before you receive all replacement property you are entitled to.
Personal property bought with the real estate is boot too. In the regulation's Example 6, $100,000 of office furniture acquired with a $1,000,000 building is incidental to it but still produces $100,000 of recognized gain, the lesser of the $700,000 realized gain and the $100,000 of non-like-kind property.
Related questions
Can I take cash out and still defer the rest of the gain?
Yes. Section 1031(b) taxes only the boot, up to your realized gain, and the like-kind portion stays deferred.
Does paying down debt count as boot?
Debt you are relieved of counts as money received, but liabilities you take on and cash you add offset it before anything is taxed; see what boot is.
Can I deduct a loss in a partial exchange?
No. Section 1031(c) says no loss is recognized when an otherwise qualifying exchange also includes money or other property.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.