Exchange Basics: What is Boot?

You won’t find the word “boot” anywhere in Section #1031 of the IRS tax code. Yet this term is one you must be familiar with when considering a 1031 exchange. Boot is an important concept to understand, because it has the potential to negatively influence the tax deferred nature of a 1031 exchange.

“Boot” is any value the investor receives that is over and above the value of the relinquished property once the 1031 transactions are completed. Boot can come in the form of money, debt relief or the fair market value of other property received by the investor in an exchange.

Money – This includes any cash (or cash equivalents) received by the investor.

Debt Relief – This is the value of any debt reduction achieved when replacement property is acquired.

Other Property – This encompasses any property received that is not “like kind.” For example, personal property received in exchange for real property, non-qualifying replacement property, real property used for personal purposes, or any sort of seller financing.

Any “boot” received in a 1031 exchange is subject to immediate tax.

Avoiding “boot” in a 1031 exchange is not difficult. It simply requires an investor to acquire replacement property that is equal to or greater in value than the relinquished property. To avoid “boot” and the subsequent tax implications, an investor should avoid “trading down” with the replacement property.

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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.