•
The 1031 Exchange "Boot" Test • |
Below, you can see
examples of the "Boot
Test", as a method to determine if
there is a potential for taxable "boot" in a transaction. It's
NOT a substitute
for professional tax advice!! ... but it can be used as a "low-tech"
analysis
to give an indication if an exchange will be fully or partially tax deferred. This test
will disclose if the exchanger is moving up and/or across in equity and mortgage. |
|
Step
One |
|
Step
Two |
|
End
Result |
|
|
(Property
Sold) |
|
(New
Purchase) |
|
(Across
or Up) |
|
|
----- |
|
----- |
|
----- |
|
| Sales
Price |
$200,000 |
|
$225,000 |
|
Up! |
|
| Mortgage
Owed |
$100,000 |
|
$125,000 |
|
Up! |
|
| Your
Equity |
$100,000 |
|
$100,000 |
|
Across! |
|
Scenario One - The example above depicts a
"fully" tax deferred
exchange. The new mortgage balance on the purchased property is
of "equal or greater value", and the equity has moved across. |
|
Step
One |
|
Step
Two |
|
End
Result |
|
|
(Property Sold) |
|
(New Purchase) |
|
(Across or Up) |
|
|
----- |
|
----- |
|
----- |
|
| Sales
Price |
$200,000 |
|
$225,000 |
|
Up! |
|
| Mortgage
Owed |
$100,000 |
|
$175,000 |
|
Up! |
|
| Your
Equity |
$100,000 |
|
$50,000 |
|
X |
|
Scenario Two - In this transaction there would be
taxable boot.
All the "equity" is not used in acquiring another "like-kind"
property.
Any cash the exchanger puts into his pocket would be taxable as
"Boot" by the Internal Revenue Service (In this case, $50,000!!). |
|
Step
One |
|
Step
Two |
|
End
Result |
|
|
(Property Sold) |
|
(New Purchase) |
|
(Across or Up) |
|
|
----- |
|
----- |
|
----- |
|
| Sales
Price |
$200,000 |
|
$175,000 |
|
X |
|
| Mortgage
Owed |
$100,000 |
|
$75,000 |
|
X |
|
| Your
Equity |
$100,000 |
|
$100,000 |
|
Across! |
|
Scenario Three - In this transaction there would also be
taxable
boot. A property of less value was purchased, and there is a new
mortgage of less value than the mortgage on the "relinquished
property". The amount difference between the two mortgages is
classified as "mortgage relief," and is taxable as boot (in
this
case, about $25,000). The only way to offset mortgage relief is to
add sufficient cash to make up for the difference in mortgages. |
Additional
1031 Exchange Pages |
*ALWAYS see your tax professional before you attempt
an IRC 1031 Exchange! |
©Copyright
Bart Austin, REALTOR®. All rights reserved. |
|
