When a taxpayer sells real or personal property, any gain realized on that sale is potentially subject to the payment of federal and state capital gains and recaptured depreciation taxes. Because the rate at which capital gains are taxed is typically high, taxpayers often turn to alternative methods of acquiring property to avoid the payment of those taxes. One such method is through a Section 1031 Exchange of property. Any potential capital gains and depreciation recapture taxes that would otherwise be due are deferred if a transaction qualifies for Section 1031 Exchange status. At its most basic, a Section 1031 Exchange contemplates a taxpayer relinquishing one property and replacing it with another property of “like-kind." Often, however, Section 1031 Exchanges are far more complicated than a simple exchange. Numerous issues come into play that can impact whether or not a transaction qualifies for Section 1031 treatment. One of those issues is the existence of “boot."
Tags: mortgage boot
1031 exchange boot is a taxable benefit received by the taxpayer in a 1031 exchange. Also known as like-kind exchanges, the capital gains deferral strategy is used by taxpayers of all means--resident and non-resident--who own property held for productive use in a trade, business or for investment and replace with like-kind property within 180 calendar days of the initial sale.
1031 exchange rules apply to Internal Revenue Code Section 1031 tax deferred exchanges. A 1031 exchange allows resident or non-resident United States federal taxpayers to defer capital gains and recaptured deprecation taxes when exchanging real or personal property held for productive use in a trade, business or for investment for like-kind real or personal property held for productive use in a trade, business or for investment. The tax otherwise paid in a traditional sale is deferred indefinitely until the replacement property is sold or another 1031 exchange is initiated.
In a 1031 exchange, additional cash infused into the transaction offsets debt, but additional debt does not offset cash received. Boot is a term used to describe the benefit received. For example, a partial 1031 exchange is when the replacement value does not exceed or is less than the value of the debt and equity in the old or relinquished property. This often happens and the difference is taxable.