The devil is in the details. Boot is the profit from an exchange that occurs when a seller exchanges a property for a property of less value or a mortgage of less value. There are two kinds of Boot, the Cash Boot and the Mortgage Boot. Sounds simple but this can get complicated easily. Let’s make it simple. Here are a couple of examples…

The devil is in the details. Boot is the profit from an exchange that occurs when a seller exchanges a property for a property of less value or a mortgage of less value. There are two kinds of Boot, the Cash Boot and the Mortgage Boot. Sounds simple but this can get complicated easily. Let’s make it simple. Here are a couple of examples…

Your basis (purchase price + capital expenses) in the property is $150,000 and you sell the property for $700,000. Your gain is $550,000. In the 1031 exchange, you purchase a property for $690,000. Your entire gain is used with the exception of $10,000 which is taxable at the full capital gain tax rate.

 

Your basis in the property is $150,000 and you currently have a mortgage on the property for $250,000. You sell the property for $700,000. The property you are buying is also $700,000 and you assume a mortgage on the property of $225,000. Oops. The $25,000 difference between you old mortgage and the new one is Boot and taxable at the full capital gain tax rate.

 

Other Boots to be Aware Of 

If you include in the purchase agreement personal property like appliances (washer, dryers, ranges and refrigerators, the value of these items will be considered Boot because they are not like kind. They should be sold outside of the real property purchase agreement. If the seller is including these items, write a separate agreement for them with a purchase price of $1.00. THESE ITEMS SHOULD NEVER BE INCLUDED IN THE EXCHANGE.

 

If you are buying properties to fix up and then sell without the intention of getting income from the property, the IRS calls the property, inventory. You cannot exchange inventory for income. The IRS has ruled that the two properties are NOT “like kind”.

 

If you own an income property and you live in one of the units or hold one of the units for personal use, the percentage of the property that you hold for your use is excluded from the 1031 exchange and is considered boot. Example…You own a 4 plex and live in one of the units your profit is $400,000 from the sale. $300,000 is eligible for the exchange and $100,000 is Boot. CALL YOUR ACCOUNTANT ON THIS ONE.