Boot is “unlike” property received in an Exchange. Cash, personal property, or a reduction in the mortgage owed after an Exchange are all boot and subject to tax. By forecasting the potential for taxable boot, the Exchanger can restructure the transaction before committing to the deal. So how can we make this work for you?
Sit down with Tina Colson and Jenni Anderson in our latest blogcast update for all things “BOOT” in an Exchange!
Tina Colson: Hi, I’m Tina Colson, with Equity Advantage, IRA Advantage, and today we have Jenni Anderson with us. Thank you for joining us. And we’re going to try to answer some of the most frequent questions that we get in the Exchange world. Jenni?
Jenni Anderson: Alright. So I’ve been doing my fair share of Googling, trying to figure out what I need to know about a 1031 Exchange, and I am all kinds of confused. I keep seeing this term pop up and I’m not sure how it relates at all to a 1031 Exchange. I hear about the boot. All I know is boots are made for walking. What place does this have in a tax deferred Exchange?
Tina Colson: I like your boot analogy. So boot is anything that is not of like kind in an Exchange and it will cause a tax consequence for you. So, that is a brief definition of boot.
Jenni Anderson: So you say exposure. I think the whole point of doing a 1031 Exchange is to be deferred. How could I be facing exposure in the form of boot?
Tina Colson: Absolutely. Great question. So let’s say you sell a million property and on your replacement side, you’re going to go down in value. If you end up purchasing at $900,000, you’re going to have boot or a tax exposure on the difference between what you sold, net of closing cost, versus the amount that you put in to purchase. So that’s one reason why you would have boot. Another reason is you need to meet also the equity requirement. So we’ve got the value requirement, which would be going down in value, would cause boot. The equity requirement would be, how much are you receiving and proceeds from your sale? So let’s say you want to pull out cash, $10,000 in cash, when you close on your relinquished property. That cash is going to also cause boot.
Jenni Anderson: So what if I don’t want to exactly pull cash out, but maybe I want to earmark $100,000 of that and pay off my primary residents mortgage?
Tina Colson: So again, you cannot use any cash for anything that is not of like kind in the Exchange. So paying off debt, that would be maybe some credit card debt or maybe your current primary residents mortgage, that doesn’t work in an Exchange. So any cash that you would pull out, again, you can do so, you’re still going to be able to defer the rest of your money and what you want to defer, but whatever cash you take out, that will be taxable to you.
Jenni Anderson: Wow, that’s really good to know. A lot of impact, if I want to actually move forward in this, ’cause these boots are getting expensive.
Tina Colson: Yes, they are.
Jenni Anderson: So let me see if I heard you correctly. If I don’t meet that full value, if I sell at $1 million and my net proceeds are maybe $800,000, can I go out and purchase at $800,000 or will I be taxed on that $200,000 difference?
Tina Colson: So you’re still going to be taxed on the difference. You’re going… So from that million dollars, you can subtract out the real estate commissions, any title, escrow fees, recording fees, any transactional costs that are typical to selling that property. So once you subtract out those closing costs, whatever value is left, not including subtracting the mortgage, so you have to make up that mortgage, you can make it up in purchasing a property at an equal or greater value to avoid the tax, you can bring in additional cash to the transaction that’s outside of the money that you’re receiving from the proceeds of the sale, that will give you full tax deferral, or you can come in with an additional mortgage to make up that difference. But if you go down in value and you’re simply using your proceeds to purchase, you’re going to have boot in that transaction.
Jenni Anderson: That’s important. Don’t take anything out, make sure it is all rolling into phase two and either replace the mortgage or bring in additional cash. Anything that’s not met in value and equity will buy me an expensive pair of boots.
Tina Colson: Exactly. Thank you so much. We’re glad that you joined us today for this boot excursion. Again, Tina Colson and Jenni Anderson, Equity Advantage, IRA Advantage. We’re happy to give free consultations and guide you in the right direction. You can find us on our website, 1031Exchange.com, our YouTube channel, like and subscribe to us. And then also if you want to give us a call, 503-635-1031. Thank you for joining us today. Take care.
Navigating 1031 Exchange options takes a professional, and you can count on the whole team at Equity Advantage to help. Your investments are just too important not to have an expert on your team. Give the folks at Equity Advantage a call, 503-635-1031, to get started!
I am selling a rental unit/condo ($790,000) I have owned for 45 years, in Cambridge, MA. I have a P&S Agreement (closing this month, March). I am buying a rental unit/house ($600,000). I have a P&S Agreement (closing on 4/12) in West Brownsville VT. I want want to use the remaining money ($190.000) to improve the Vermont property: install solar heating, A/C, add a shower to the 1st floor bathroom, install remote control shades, landscape (increase size of backyard, remove dead trees and plant trees), add an awning to the deck. Can I make these improvements, using the boot ($190,000) for this 1031 Exchange?
You can engage in a 1031 Improvement Exchange to use the remaining proceeds from the relinquished property to make capital improvements to the replacement property. You will have a total of 180 days from the time of closing on the relinquished property to purchase and absorb the $190,000 difference into the VT property.