Reviewing 1031 Basics: What is Boot?

Even though you will not find the word “boot” anywhere in Section #1031 of the IRS tax code, it is something you must understand if you are contemplating a 1031 exchange. Why? Because it has the potential to negatively influence the tax deferred nature of your transactions.

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.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.