mortgage boot

What is Mortgage Boot in a 1031 Exchange?

Mortgage Boot

If you’re at all familiar with 1031 exchanges, you’ve likely heard the term “boot” before. Boot is something you want to avoid at all costs in order to complete a fully tax-deferred exchange of property. But boot comes in several forms. In this article, we are going to talk about mortgage boot and how to avoid it in a 1031 exchange of real estate.

Triggering Mortgage Boot

Mortgage boot occurs when the taxpayer doing the 1031 exchange is discharged of debt when they sell their relinquished property and the debt is not properly offset.

Avoiding Mortgage Boot

In order to effectively avoid mortgage boot and the trigger of gain in your 1031 exchange, you need to be sure that your discharged debt is offset by one of the following:

  • New Debt (of equal or greater value) on the new replacement property.

  • Cash contributed for the replacement property that’s equal to the amount of debt relief from the sale of the relinquished property.

1031 Exchange Services

If you are looking to defer your capital gains taxes on the sale of real estate, look no further than the 1031 exchange professionals at CPEC1031. Our qualified intermediaries have decades of experience in Minnesota and around the country with all types of exchanges – from forward to reverse. Having a qualified intermediary on your team is the best way to ensure your 1031 exchange completes as planned. Our intermediaries can draft your 1031 exchange documents, answer your questions, and advise you throughout the exchange process. Call today to chat with our MN qualified intermediaries about your exchange.

  • Start Your Exchange: If you have questions about mortgage boot, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

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Boot in a 1031 Exchange - What it is & How to Avoid it

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In this 1031 FAQ video, Jeff Peterson explains what boot is in a 1031 exchange and how to best avoid it. Watch more 1031 educational videos here.

  • Start Your 1031 Exchange: If you have questions about boot in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Whiteboard Video - What is "Boot" in 1031 Exchanges?

In this whiteboard video, we talk about the concept of "boot" in a 1031 exchange.

If you enjoyed this video, check out our other whiteboard animation videos:

Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

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What is Cash Boot in a 1031 Exchange?

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cash boot in 1031 exchange

There’s a term of art in 1031 exchanges called “boot.” In this article, we will define boot and discuss some examples that you might run into during your 1031 exchange.

Boot Defined

Boot is basically any non-like-kind property you receive during a 1031 exchange. For example, let’s say you exchange an apartment building for another apartment building, but you don’t reinvest all of your cash. That cash is boot (i.e. non-like kind property you received during the transaction).

Another way to get boot is if you engage in seller-backed financing on the sale of your old relinquished property. If the buyer gives you a promissory note for 10% of the purchase price and you put it in your pocket, you’ve just received some non-like-kind property in the exchange process. So seller-backed financing can be a tricky area. You want to work with your QI to find ways to redeploy all of your net proceeds (cash and non-cash) into your replacement property.

Personal Property

Boot can also come in the form of personal property that might come along with the real property. Usually small incidental amounts of personal property are not a big deal. But if you’ve got a large amount of personal property (maybe forklifts or other business equipment in a real estate exchange), those items of personal property might trigger some boot.

One way to fix this issue is to have separate purchase agreements for the personal property and to pay for that with non-1031 funds. That way you are able to keep your 1031 monies apart from any other assets that might not be considered like-kind.

Mortgage Boot

There is also another term called "mortgage boot." If the property you are selling has debt encumbering it, that relief of the debt may be considered boot to you when the relinquished property is sold and the debt is discharged (or assumed by the buyer). In order to off-set this potential mortgage boot and so you do not have to recognize gains due to the debt-relief, you should either take-out an equivalent or greater amount of debt in conjunction with the purchase of your new replacement property (equal to or greater than the old debt that was satisfied or assumed by the buyer of your old relinquished property). You may also invest additional non-1031 cash for the purchase of the new replacement property.

  • Start Your Exchange: If you have questions about boot in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Defer the tax. MAXIMIZE your gain.