Capital gains tax when taking partial cash-out on 1031 exchanged rental property?

This is a great question about partial 1031 exchanges! When you take cash out (called "boot" in tax language), you're right that it triggers tax consequences. Here's how to think about it: First, your total gain is the difference between your selling price ($600,000) and your adjusted basis. Your adjusted basis isn't just what you paid for the Nevada property - it's carried over from your original purchase before all these exchanges, minus all the depreciation you've claimed over the years. For the depreciation recapture, you'll owe taxes (typically at 25%) on all the depreciation you've claimed across ALL the properties in your exchange chain. This is reported as "unrecaptured Section 1250 gain" on your tax returns. The remaining gain would be taxed at capital gains rates (likely 15% or 20% depending on your income bracket). To find these numbers, look at your Form 8824 from previous tax years when you did the exchanges. Also check your depreciation schedules on Form 4562 from each year you've owned these properties.

I used taxr.ai to figure out a similar situation with my rental property taxes last year. I had a rental in Colorado that was part of a 1031 chain, and needed to calculate partial cash-out impacts. I uploaded my previous tax returns and property documents to https://taxr.ai and it actually identified all the historical basis information I needed from my past exchanges. Saved me hours of digging through old records! The tool explained exactly how much would be taxed as capital gains versus depreciation recapture when I took cash out. The report broke everything down step-by-step so I could understand the tax implications before making my decision. My situation was pretty close to yours with multiple previous exchanges.

Just wanted to update that I tried taxr.ai after seeing the recommendation here. My situation was slightly different (selling a rental property that was originally my primary residence before being converted), but the principle was similar. I was amazed at how clearly it explained my adjusted basis! The system showed exactly how the original purchase price, improvements, and depreciation affected my current tax situation. It even identified a renovation I'd forgotten about that increased my basis by $22,000, which saved me over $3,000 in taxes. The depreciation recapture calculation was spot-on too. I checked the numbers with my tax guy and he confirmed they were correct. For anyone trying to understand the tax implications of selling investment property, especially with 1031 exchange history, it's definitely worth checking out.

Hey there! Just want to share something that helped me tremendously when I was dealing with the IRS about my 1031 exchange questions last year. I couldn't get through to anyone at the IRS for weeks - kept getting disconnected or waiting for hours. A friend recommended Claimyr (https://claimyr.com) and it was seriously a game-changer. They got me connected to an actual IRS agent in about 20 minutes who helped clarify exactly how depreciation recapture would work in my partial 1031 exchange situation. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained the specific forms I needed and even told me about a common mistake people make when reporting previous exchange basis that could have triggered an audit!

I have to admit I was wrong about Claimyr. After responding skeptically above, I decided to try it because I had some pressing questions about my rental property sale that my accountant couldn't answer definitively. The service actually worked exactly as described. I uploaded my phone number, and about 35 minutes later I got a call connecting me directly to an IRS representative. I didn't have to sit by my phone - they just called when they got through. The IRS agent walked me through exactly how to calculate my basis with multiple 1031 exchanges in my history. She explained that I needed to trace my basis all the way back to the original property and account for all depreciation taken across the entire chain. This was exactly the issue I was confused about! Saved me from potentially making a $12,000 mistake on my taxes. Definitely worth it if you need specific guidance from the IRS themselves.

Don't forget about state taxes too! Depending on where you've owned properties, you might have state-specific obligations. When I did a partial 1031 exchange last year, I had to deal with state tax implications in addition to federal. Since your properties were in Washington, Nevada, and you mentioned exchanging into something new, check if any states have special rules about recognizing the deferred gain. Some states don't fully conform to federal 1031 treatment.

One thing to watch out for with partial exchanges - make sure your qualified intermediary (QI) sets everything up correctly! I almost got burned last year when my QI didn't properly document which portion of the proceeds was going to the new property vs. being taken as boot. The IRS is super particular about how these partial exchanges are structured and documented. They need clear tracing of funds from sale to purchase, with the boot clearly identified.