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Avoiding Boot

This term does not relate to footwear at all, but rather to personal property in an exchange that is not considered “like kind” as to the other property acquired in an exchange transaction. A typical example of “boot” is extra cash that may be pulled out from the sale of a relinquished property but does not go into the replacement property.

While the receipt of boot will not disqualify the exchange, an Exchanger who receives boot in an exchange transaction generally recognizes gain to the extent of the value of the boot received, and therefore will have to pay capital gains tax on this amount.

Other examples of Boot generated in the Exchange process are:

Proceeds taken from the exchange in the form of a note or contract for sale of the property.
Relief of debt on the Relinquished Property caused by the assumption of a mortgage, trust deed, contract, or an agreement to pay other debt that is not replaced on the Replacement Property
Personal Property received in the exchange. Personal Property is never “like-kind” to real property
Property that is intended for personal use and not for use by the Exchanger as either his/her investment or business use property.

To AVOID the receipt of Boot the Exchanger should:

Purchase “like-kind” Replacement Property of equal or greater sales price than the Relinquished Property
Reinvest all of the new equity (exchange funds) from the sale of the Relinquished Property in the purchase of the Replacement Property
Obtain equal or greater debt on the Replacement Property than was paid off, assumed, or taken subject to on the Relinquished Property.
Exception: A reduction in debt on the Replacement Property cannot offset a reduction in the exchange equity, thereby resulting in excess exchange funds upon the completion of the exchange. Any excess exchange funds will be Boot and the capital gain tax will be recognized to the extent of the Boot received.

Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC. Advisory services offered Pacific West Financial Consultants, Inc. A Registered Investment Advisor. AMBAR Financial Group is independent of Pacific West Securities, Inc.

Hotel
Dallas, Texas

Hotel
Dallas, Texas

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