It’s kind of a cool term. Feels like old-fashioned vernacular.
But what does it mean?
As we explain in our Examples of “Boot” post
If you receive a “boot” item, you’re taxed on its value.
The most common 1031 boot item is cash.
Let’s explore that next.
Take out cash when you sell?
It all becomes taxable. The same is true if you later receive cash from your 1031 escrow account.
Here’s an example.
That $50K instantly becomes taxable at the highest applicable rate.
It doesn’t matter what you do with the $50K.
Even if you replace the $50K when you purchase a replacement property, it’s still taxable.
The next most common kind of boot is debt relief.
Fail to replace the value of the mortgage on your relinquished property?
That’s taxable too.
This is how it works.
Imagine you sell a relinquished property for $500K. But you only purchase one replacement property for $400K.
This time, all of the equity went into the replacement property.
But you traded down by $100K.
Here’s what the IRS sees:
You Gave Up
Debt relief is not “like-kind” to real property.
(Pro Tip: You can replace the amount of debt by adding new debt on to your replacement property or bringing new outside cash to the deal)
For example, this is a completely tax-deferred 1031 exchange.
You could accomplish the same goal by simply increasing the principal on your new mortgage.
No reason to over-complicate.
Here are the two most important rules for all 1031 exchanges.
These will avoid almost all major boot items.
Beyond these, work closely with your qualified intermediary and tax advisor.
We hope you enjoyed the read.
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