10 Things to Know About a 1031 Exchange - Part 3

To finish up my three-part series on the 10 things to know about #1031 exchanges (did you miss parts one and two?), I present the final three things to know before you start an exchange.

Beware The Boot

If you receive any cash during your 1031 exchange, the value is known as “Boot.” Boot is immediately taxable to you as a partial capital gain. You are able to receive boot and still have a valid exchange. It is just important to understand that this will be considered a taxable event in the tax year of your exchange.

Boot Comes In Other Forms, Too

It isn’t just cash that can be considered boot. If, at the conclusion of your 1031 exchange, your debt liability goes down, that will also be treated as income to you and you will be taxed accordingly.

Exchange Your Vacation Home With Caution

Although primary personal residences are excluded from 1031 exchanges, 8under certain circumstances you can successfully exchange a second home. To effectively do so, the property must be 100% a rental property and your personal use cannot exceed 15 days per year or 10% of the number of days during the year for which the dwelling is rented out at fair market value.

As with all things related to the IRS, there are many pitfalls involved for the unwary investor. It is important to consult with a 1031 exchange professional before you try to swap, to ensure you are not caught off guard.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.