If you receive cash from the sale of your original property or buy a replacement property with a lower debt level, the difference is known as boot (or taxable boot) and is taxable to the extent of the capital gain you realized on the exchange.
How is a 1031 exchange boot calculated?
The taxable amount of the transaction. If there is no 1031 exchange, it is the difference between the net sales price and the adjusted cost basis. If a 1031 exchange is performed, it is any amount purchased less than the net sale OR any amount of cash taken from the net proceeds (often referred to as “boot”).
What year is boot taxable in a 1031 exchange?
In effect they received the excess cash at the time of the sale, which is why it is taxable in 2005. Be careful when you have “cash boot” that would be taxable in the subsequent year that you consider depreciation recapture.
What rate is boot taxed at?
Capital gain tax on boot can be as high as 20% depending on your income bracket. Factors that can create boot include cash proceeds, mortgage reduction, non-like-kind property, and non-transactions costs such as tenant deposits.
Can you live in your 1031 exchange property?
Property that you hold primarily for personal use cannot be utilized in a 1031 exchange. The general rule is that you should not be living in any property that you wish to exchange with a 1031 transaction – though there are some exceptions to that rule.
What is a boot in a section 1031 exchange?
The term “boot” is not used in the Internal Revenue Code or the Regulations, but is commonly used in discussing the tax consequences of a Section 1031 tax-deferred exchange. Boot received is the money or the fair market value of “other property” received by the taxpayer in an exchange.
Is the gain on a 1031 exchange taxable?
Any boot received is taxable (to the extent of gain realized on the exchange). This is okay when a seller desires some cash and is willing to pay some taxes. Otherwise, boot should be avoided in order for a 1031 Exchange to be tax free.
What does ” other property ” mean in Section 1031?
“Other property” is property that is non-like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or “non-qualified property.” “Other property” also includes such things as a promissory note received from a buyer (Seller Financing).
Can a 1031 sale trigger personal property boot?
Using 1031 sale proceeds to pay for these items will trigger Personal Property Boot (which is a subset of Cash Boot). This is pretty rare for most investors, but we think it’s worth planting a flag here. If you or your business work with appliances, inventory, and other non-real estate assets, pay particular attention.
