Redirecting to cart, please wait...
You have items(s) in your cart.
by Kevin Just, CPA
Can I take a portion of the proceeds from a 1031 exchange for personal use? Will it be taxed as capital gains?
You can take some or all of the proceeds from a 1031 exchange out of the exchange and use it for any purpose you like. There are many calculations that are necessary in order to determine whether this would be considered a taxable event. Generally speaking, however, withdrawal of funds would be a taxable event.
The tax rate on the cash that you withdraw depends on the property that was sold. You may have sold raw land, rental real estate, a business, a vehicle or collectibles. Normally, if there is tax, you recognize the income first that has the highest tax rate. For example, you take $10,000 out of the exchange upon the sale of rental real estate that you held for over one year. You also previously reported $5,000 of straight-line depreciation. Of the $10,000 gain that you will report, you will first have $5,000 of depreciation recapture taxed at 25 percent and the rest taxed at 15 percent. If you are in California, all reportable gain will be taxed at normal rates.
There are many other types of assets that might be exchanged and each may have one or more of the above tax rates applied.
Like-kind exchanges are complicated. You would be wise to seek legal advice or consult a CPA should you want to transfer your property in a future 1031 exchange. You can find out more about like-kind exchanges by watching or listening to CalCPA’s Financial Empowerment podcast on the subject.
Kevin Just is a San Jose, Calif., CPA, and principal with the firm of Just, Gurr & Associates. You can reach him at (408) 271-2200.
Have a question for a CPA? Ask it here.