A Partial Exchange refers to a scenario where a taxpayer exchanges a relinquished property for a replacement property of lesser value. Under Section 1031 of the U.S. Internal Revenue Code, the 1031 exchange allows for the deferral of capital gains taxes when an investor sells a property and uses the proceeds to purchase a like-kind property within a specific timeframe.

In a partial exchange, because the replacement property’s value is less than the relinquished property’s value, the difference is considered boot. Boot is any value received in an exchange that isn’t like-kind property. This can be in the form of cash, mortgage relief, or other non-like-kind property. The recipient of the boot might be liable for capital gains tax on that portion of the transaction.

For instance, if an investor sells a property for $500,000 and uses the proceeds to purchase a replacement property worth $450,000, the $50,000 difference is considered boot and may be subject to capital gains tax.

It’s always essential to work with professionals well-versed in the nuances of the 1031 exchange when considering such a transaction to understand all potential tax implications.