1031 Exchange boot

Any boot received is taxable (to the extent of gain realized on the exchange). If you sell a property with a larger mortgage than the property that you buy, this would be considered a mortgage boot. The first is when you receive cash during or after an exchange , because you did not fully invest the proceeds in the new property.

The second is when the mortgage paid off by the sale of the old property is greater than the mortgage on the new property being taken over. Another way that you can receive boot is on the purchase of the replacement property.

This in cash boot. You need to make sure that all of your equity, all of your net proceeds gets applied for the purchase of your like kind real estate. Usually boot is in the form of cash, an installment note, debt relief or personal property and is valued to be the “fair market value” of the non-like-kind property received. Realty transfer taxes or stamps can also be paid. The two most common forms are cash boot and mortgage boot.

Boot can take various forms. In a direct swap exchange involving only two parties, boot is less common.

Of course, it’s often deeper and more complex than that. But this is a good starting point. A cash boot is any extra money returned to the purchaser after the completion of the exchange. In other words, when the complete value of your relinquished property is not replaced by eligible replacement property, the unused value is called boot. To put it simply, this strategy allows an investor to “defer” paying capital gains taxes on an investment property when it is sol as long another “like-kind property” is purchased with the profit gained by the sale of the first property.

The tax code specifically excludes some property even if the property is used in trade or business or for investment. These excluded properties generally involve stocks, bonds, notes, securities and interests in partnerships. It is important to understand what items will be considered additional value, or boot because boot will cause a taxable event.

However, these exchanges can include “boot,” which is an unofficial term for other property received in the exchange. Understanding the term is important because boot is taxable. Some expenses that are expenses of owning property (such as property taxes and insurance) rather than expenses related to the sale or purchase are considered “non-exchange expenses.

When depreciable real estate is sold gain on the sale is taxed under the capital gains tax rules at a maximum of to the extent of any depreciation taken on the property being sold. Gain in excess of the depreciation taken is taxed at a maximum rate of. Click here for a simple analogy. In relation to like-kind exchanges, there are two classic types of boot - cash boot and mortgage boot or debt relief.

Learn about each in this short.

Here’s how to avoid cash boot. And yes, the entire $10is taxable. Typically all routine transactional costs associated with the sale of the relinquished property and acquisition of the replacement property can be paid from exchange funds.

The authority cited is Long v. Download the free step-by-step guide to Build-to-Suit or Property Improvement Exchanges. If your new property is less valuable than the equity in your old one, you will have “boot. Normally, when you sell investment or business assets at a gain, you have to pay capital gains tax on that gain at the time of sale.