“Boot” is any cash or non-like-kind property you receive in a 1031 exchange. It’s important to remember that boot is taxable. If you do not reinvest in like-kind property, any proceeds you receive is taxable boot!
2 Ways to Receive Boot
There are two common ways in which investors receive boot during a 1031 exchange:
Cash Boot: You receive cash or other property from the 1031 exchange.
Mortgage (Debt Relief) Boot: You owe less debt on your new 1031 replacement property than you paid off on the old relinquished property. For example, if you sell a property with a $500k mortgage and replace it with a property that has a $400k mortgage, you have $100k in debt relief. This $100k would be taxable boot.
How to Avoid Boot
Here are some tried and true methods for avoiding boot in your 1031 exchange:
Make sure you reinvest all of your proceeds into your replacement property.
Acquire property of equal or greater value.
Replace or offset debt relief.
Do not take any cash at closing.
If you want to take some cash at closing, you have the option to do so, but keep in mind that any cash you take is taxable. For example, if you sell a property for $1 million and purchase a replacement property for $950k, and pocket $50k in cash, that $50k is taxable boot.
Find a 1031 Exchange Intermediary
If you are embarking on a 1031 exchange, it’s a best practice to work with a qualified intermediary who has experience in the 1031 exchange industry. At CPEC1031, LLC our intermediaries have facilitated countless like-kind exchange transactions of all types (forward, reverse, construction, and more!) We can guide you through the like-kind exchange process and make sure you have a comprehensive understanding of the ins and outs of the 1031 exchange process so you are ready when it comes time to close on your property. Contact our team of 1031 exchange professionals today to set up a time to chat.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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