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Q. What is "boot?"
A. To qualify for exchange treatment, you must exchange property for
"like kind" property. Anything you receive which is not like kind
property is called "boot" and may be taxed. See our notes on What
is Like Kind Property?
Two types of boot are often a concern. One is cash taken out of the
transaction. If you exchange a property worth $100,000.00 with no mortgage for a
property worth $80,000.00 with no mortgage, you would receive $20,000.00 in
cash. Cash is not like kind to real estate, so the $20,000.00 is boot, and may
be taxed.
The other type of boot which is often a concern is "net debt
relief." If you exchange a real estate worth $100,000.00 with a mortgage of
$50,000.00 for a real estate worth $80,000.00 with a mortgage of $30,000.00 your
will receive no cash. However, your net debt will be reduced by $20,000.00. That
net debt reduction is boot, and may be taxed.
Boot does not prevent you from receiving exchange treatment. Sometimes, it
makes sense to take some boot and pay tax on it. However, the boot may be taxed,
and, depending on how much boot you receive, and how much tax you pay, this may
defeat your purpose in doing an exchange.
Boot is only taxed to the extent of your capital gain. This means that you
will not pay any more tax if you receive boot in an exchange than you would if
you did an ordinary sale and purchase. But, boot needs to be carefully examined
to see what it does to the tax benefit of your exchange. An attorney or
accountant can assist you with this. Get sound advice from a licensed
professional!
Rice & Stallknecht, P.C. would be honored to
assist you.
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