1031 Exchange · Investment Strategy · Los Angeles
Can You Take Cash Out With a Partial 1031 Exchange in Los Angeles?
Justin Borges, DRE #01940318 · 12 min read · Updated July 26, 2026
Yes. A partial 1031 exchange lets a Los Angeles real estate investor reinvest less than the full sale proceeds into a replacement property and take the rest out as cash. The unreinvested portion, called boot, becomes immediately taxable, while the reinvested portion still qualifies for full tax deferral under Section 1031 of the Internal Revenue Code.
Sources: IRS Section 1031 rules, irs.gov; California FTB Form 3840 instructions, ftb.ca.gov.
What You Will Learn
- Can You Take Cash Out With a Partial 1031 Exchange in Los Angeles?
- What Is "Boot" in a Partial 1031 Exchange?
- How Is Cash Boot Taxed Differently From Mortgage Boot?
- What Deadlines Still Apply to a Partial 1031 Exchange in Los Angeles?
- Does California Tax a Partial 1031 Exchange Differently Than the IRS?
- Can I Use a Delaware Statutory Trust to Complete a Partial Exchange?
- What Is My Combined Tax Rate on Boot in Los Angeles?
- How Do I Decide How Much Boot to Take in a Partial 1031 Exchange?
- Frequently Asked Questions
Can You Take Cash Out With a Partial 1031 Exchange in Los Angeles?
Yes. A partial 1031 exchange occurs when a Los Angeles investor reinvests less than the full sales proceeds from a relinquished property, or reduces mortgage debt when acquiring the replacement property. The cash received in either case is boot, and it becomes taxable, while the reinvested balance keeps its Section 1031 tax deferral.
This flexibility is particularly valuable for a Los Angeles investor who needs liquidity, whether for another investment, a renovation, or simply cash flow, without giving up the deferral benefit on the rest of the transaction.
Investors think a 1031 exchange is all-or-nothing. A partial exchange lets a Los Angeles seller take some cash now and still defer tax on the rest.
Justin Borges, CA DRE #01940318What Is "Boot" in a Partial 1031 Exchange?
Boot is any value received in a Los Angeles 1031 exchange that is not reinvested into like-kind replacement property (IRS). It comes in two forms. Cash boot is money actually kept at closing, for example an investor who sells a Los Angeles property for $2 million but reinvests only $1.7 million has $300,000 in taxable cash boot. Mortgage boot, also called debt relief boot, arises when the replacement property carries a smaller loan than the relinquished property did, even without any cash physically changing hands.
Both forms count toward the same taxable boot total, and a Los Angeles investor structuring a partial exchange needs to track both, not just the cash portion, when estimating the resulting tax.
How Is Cash Boot Taxed Differently From Mortgage Boot?
| Scenario | Relinquished Property | Replacement Property | Boot |
|---|---|---|---|
| Cash boot | $2,000,000 sale, no mortgage | $1,700,000 reinvested | $300,000 cash boot |
| Mortgage boot | $3,000,000 property, $1,500,000 mortgage | $2,800,000 property, $1,200,000 mortgage | $300,000 mortgage boot |
Both scenarios above produce the same $300,000 of taxable boot for a Los Angeles investor, calculated the same way, as gain recognized up to the amount of boot received. The difference is practical, not tax-rate based: cash boot puts money in the investor's hand immediately, while mortgage boot is a paper reduction in debt that still triggers tax without a cash distribution to cover it, which a Los Angeles seller should plan for before closing.
What Deadlines Still Apply to a Partial 1031 Exchange in Los Angeles?
A partial exchange runs on the identical clock as a full Los Angeles 1031 exchange: 45 days from closing the relinquished property to identify replacement property in writing, and 180 days from that same closing, or the investor's tax return due date if earlier, to complete the purchase (IRS). Taking boot does not extend either deadline.
The identification rules also carry over unchanged: an investor may identify up to three replacement properties of any value, or an unlimited number if their combined value does not exceed 200 percent of the relinquished property's value, or an unlimited number of any combined value as long as at least 95 percent of the identified value is actually acquired (IRS). A Qualified Intermediary is required in every case to avoid constructive receipt of the sale proceeds.
Does California Tax a Partial 1031 Exchange Differently Than the IRS?
California follows the same federal deferral rules, so the boot-versus-deferred-gain split is calculated the same way at the state level. Where California adds a requirement the IRS does not, though, is ongoing reporting: an investor must file California FTB Form 3840 annually, tracking basis adjustments and depreciation recapture, until all deferred California-source gain has been recognized, even in a year with no additional transaction (Franchise Tax Board).
Skipping Form 3840 in a later year does not undo the exchange, but it is a compliance failure a Los Angeles investor should build into their annual tax preparation checklist for as long as any deferred gain remains outstanding.
Can I Use a Delaware Statutory Trust to Complete a Partial Exchange?
Yes. A qualifying interest in a Delaware Statutory Trust is treated as like-kind real property for Section 1031 purposes, which means a Los Angeles investor can reinvest part of the sale proceeds into a professionally managed DST while taking the remainder as taxable boot. This combination is popular with investors transitioning from active property management toward a more passive holding while still taking some cash off the table.
A DST interest is illiquid compared to direct ownership, so a Los Angeles investor should weigh that trade-off against the convenience of passive management before committing exchange proceeds to one.
What Is My Combined Tax Rate on Boot in Los Angeles?
Boot recognized in a Los Angeles partial exchange is generally taxed as long-term capital gain, at a federal rate of 0, 15, or 20 percent depending on taxable income, plus the 3.8 percent Net Investment Income Tax for higher earners (IRS). California adds its own tax on top, since the state taxes capital gains as ordinary income with a top marginal rate of 13.3 percent (Franchise Tax Board). Stacked together, these components can combine to a marginal rate approaching or exceeding one-third of the recognized boot for a high-income Los Angeles seller.
The exact combined percentage depends heavily on the investor's total taxable income for the year, so a Los Angeles investor should run the actual numbers with a tax professional before finalizing how much boot to take, rather than assuming one flat combined rate applies to every seller.
How Do I Decide How Much Boot to Take in a Partial 1031 Exchange?
Start with the actual cash need, whether that is a down payment on another Los Angeles property, a business expense, or personal liquidity, and work backward from there rather than taking a round number. Next, calculate the resulting tax on that specific boot amount using current federal and California rates, so the after-tax cash in hand is known before closing, not estimated afterward.
Because the boot decision directly affects both immediate liquidity and long-term deferred gain, Los Angeles investors weighing a partial exchange, a full exchange, or an outright sale often benefit from a conversation about which structure fits the property and the timeline before choosing.
Frequently Asked Questions
Can you take cash out with a partial 1031 exchange in Los Angeles?
Yes. A partial 1031 exchange lets an investor reinvest less than the full sale proceeds into a replacement property. The unreinvested portion, called boot, becomes immediately taxable, while the reinvested portion still qualifies for tax deferral under Section 1031 (IRS).
What is boot in a partial 1031 exchange?
Boot is any value received in an exchange that is not reinvested into like-kind replacement property. It comes in two forms: cash boot, which is sale proceeds not reinvested, and mortgage boot, which is a reduction in loan balance between the relinquished and replacement properties (IRS).
How is cash boot taxed differently from mortgage boot?
Both are taxable, and both are calculated the same way, as gain recognized up to the amount of boot received. Cash boot is actual money kept at closing. Mortgage boot is debt relief, meaning the replacement property carries a smaller loan than the relinquished property did, even if no cash physically changed hands.
What deadlines still apply to a partial 1031 exchange?
The same deadlines as a full exchange: 45 days from closing the relinquished property to identify replacement property, and 180 days from that closing, or the tax return due date if earlier, to complete the purchase. The 3-property, 200 percent, and 95 percent identification rules also still apply (IRS).
Does California tax a partial 1031 exchange differently than the IRS?
California follows the same federal deferral rules but requires ongoing reporting. An investor must file California FTB Form 3840 annually until all deferred California-source gain has been recognized, even in years with no additional transaction (Franchise Tax Board).
Can I use a Delaware Statutory Trust to complete a partial 1031 exchange?
Yes. A qualifying interest in a Delaware Statutory Trust is treated as like-kind real property for Section 1031 purposes, which lets an investor reinvest part of the proceeds into a professionally managed DST while taking the rest as taxable boot.
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