WHAT IS BOOT?
Boot is defined as any NON LIKE KIND property received by the Exchanger in the exchange and it is taxable.
1) CASH BOOT:
Cash Boot consists of any funds received by the Exchanger, either actually or constructively. If an Exchanger does not spend all of the proceeds from the sale of the relinquished property, he/she will have actual receipt of the balance not spent and pay taxes on that amount.
Constructive receipt of funds may occur in a case where the Exchanger carries back a note from his/her Buyer of the relinquished property, then sells that note at a discount. The Exchanger never actually receives funds for the discounted amount, however, he/she has constructively received that discount and pays tax on that amount.
2) MORTGAGE BOOT OR DEBT RELIEF:
Mortgage Boot occurs when the Exchanger does not acquire debt that is equal to or greater than the debt that was paid off, therefore, they were RELIEVED of debt. If the Exchanger does not acquire equal or greater debt on the replacement property, they are considered to be RELIEVED OF DEBT, which is perceived as taking a monetary benefit out of the exchange. Therefore, the debt relief portion is taxable, unless offset by adding equivalent cash to the transaction. More to it than just spending all the exchange equity!!
So an Exchanger must buy of equal or greater value while spending the NET (after costs) equity. It is absolutely acceptable to take cash out of the exchange and pay taxes on that amount only.
IMPORTANT: If the Exchanger wants cash out of the PHASE I exchange, the Intermediary must be notified immediately. The cash out must come directly out of the closing of Phase I and not from the Intermediary. Once the exchange equity is in the Qualified Escrow Account at the Intermediary's, the Exchanger cannot access the funds until the end of the exchange.
DISCLAIMER: PLEASE NOTE THIS IS NOT INTENDED TO BE TAX ADVICE IN ANY CONCEPTION OF THE TERM. YOU ARE ADVISED TO CONSULT WITH YOUR LEGAL AND/OR TAX ADVISOR BEFORE ATTEMPTING ANY SALE, PURCHASE OR EXCHANGE OF REAL PROPERTY.
IT IS STRONGLY RECOMMENDED THAT YOU CONSULT WITH YOUR LEGAL COUNSEL, TAX ADVISOR AND YOUR COMPANY MANAGEMENT REGARDING ANY SPECIFIC SITUATIONS OR HOW THE INFORMATION CONTAINED IN THIS MATERIAL RELATES TO YOU, YOUR COMPANY'S POLICY AND/OR ALL TAX, LEGAL AND LOCAL PRACTICES.
ALL INFORMATION CONTAINED HEREIN IS FROM RELIABLE SOURCES AND IS DEEMED TO BE ACCURATE, BUT IS IN NO WAY GUARANTEED TO BE ACCURATE . ALL OF THE INFORMATION HEREIN, IS CURRENT AS OF 2-1-1996. BE SURE TO CONTACT YOUR LEGAL AND TAX ADVISORS FOR ANY CHANGES AND UPDATES.
Why 1031 Tax Exchange?
1031 Tax Exchange Glossary