Boot

The Many Forms of Boot in a 1031 Exchange

1031 Exchange Boot

As we’ve discussed before, you want to avoid receiving boot at all costs in your 1031 exchange. But many people don’t realize that boot can come in several different forms. In this article, we are going to explain the many forms that boot can take in a 1031 exchange and how to avoid each one.

Cash Boot

Cash is the most common type of boot. Essentially, any cash that you receive during the 1031 exchange process is considered boot. You then need to pay capital gains taxes on that cash boot, which is exactly what you want to avoid in a 1031 exchange of real estate. Your exchange won’t necessarily fail if you receive cash boot, it just won’t be a completely tax-deferred exchange.

Debt Liability

Cash is not the only form of boot you can potentially receive in a 1031 exchange. If your debt goes down when you exchange into your replacement property, that can also be considered taxable boot. That’s why it’s important to make sure your replacement property is equal to or greater than your relinquished property when it comes to debt.

Non-Transactional Costs

Rent prorations, tax prorations, and any other charges to the borrower that are unrelated to the closing of the replacement property can also be considered boot. Bring cash to the closing table and use it to pay these costs so you don’t recognize any gain on them.

Minnesota Qualified Intermediary Professionals

For 20 years, Commercial Partners Exchange Company has been helping people with their 1031 exchanges from start to finish. Our qualified intermediaries are proficient in facilitating 1031 exchanges of real estate. Whether you’re interested in a forward exchange, a reverse exchange, or a build-to-suit exchange – we can help. Contact us today at our Minneapolis office to get your 1031 exchange up and running. We work with clients in Minnesota and across the country.

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

Defer the tax. Maximize your gain.

 

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

3 Workarounds to Avoid Boot When Financing a 1031 Exchange with a Note

Avoid Boot

Can you do a 1031 exchange and take back a note to finance the buyer’s purchase? That’s our topic for today’s article.

Workarounds

Receiving a note or contract for deed may trigger boot. Here are a few potential workarounds:

  • You can use a note and have the seller bring the loan money to the closing so the loan is not funded with the net proceeds from the sale. This way all of the funds can go directly into the 1031 exchange account.
  • You can run the note of contract for deed in favor of the qualified intermediary. This insulates the person doing the exchange from receiving any boot. Then, prior to closing on the replacement property, you can buy the note from the intermediary so there is cash in the 1031 exchange account.
  • If the replacement property seller is willing to accept the note as partial payment, it might be possible to allonge the note together with additional cash consideration.

1031 Real Estate Exchanges in Minnesota

Commercial Partners Exchange Company is one of the most experienced 1031 exchange companies in Minnesota – having just celebrated twenty years in business. Our team of qualified intermediaries helps clients across the country with their 1031 exchanges of real property. A 1031 exchange can save you a lot of money in capital gains taxes, and a qualified intermediary can make sure that you have all of your bases covered during your exchange. Contact us today at our downtown Minneapolis office and learn more about the tax-saving benefits of the 1031 exchange!

  • 1031 Hotline: If you have questions about boot in 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

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 (Commercial Partners Exchange Company). 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.

  • 1031 Hotline: 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

Tips for Avoiding Boot in a 1031 Exchange

Cash Boot in a 1031 Exchange

When it comes to 1031 exchanges, boot is defined as any non like-kind property that the taxpayer receives from the sale of their relinquished property. Any boot received will be subject to tax, so it’s important to avoid boot in order to ensure your 1031 exchange is completely tax-free. In this article, we are going to offer up a few tips for avoiding boot in a 1031 exchange of real estate.

Security Deposits, Rent & Tax Prorations

Security deposits, rent and tax prorations are all items that can trigger boot in a 1031 exchange. The best way to deal with these items is to pay these items outside of closing and keep them off the closing statement.

On the replacement property side of things certain closing costs related to the new mortgage or deed of trust may trigger boot as well. If possible, avoid using the exchange funds to pay for these items.

When in Doubt

If you have any doubts about whether certain expenses will trigger boot, it’s always best to play it safe and pay those expenses in cash, in a separate transaction, outside of closing. You can also consult with a qualified intermediary about your situation and see how you can best avoid boot in your transaction.

Minneapolis Qualified Intermediary

Commercial Partners Exchange Company has been providing 1031 exchange accommodation services to taxpayers for decades. Our qualified intermediaries have the industry knowledge and experience to help advise you on your 1031 transaction. Contact our 1031 exchange professionals today to learn more about the tax-saving benefits of a 1031 exchange. Our office is located in downtown Minneapolis, but we serve clients across the country!

  • 1031 Hotline: If you have questions about boot in a 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Accounting Requirements in a 1031 Exchange

1031 Exchange Accounting Requirements

In a 1031 exchange, there are three general benchmarks that you want to be cognizant of.

Value, Equity, Debt

  • In order to cover all of the gain you have to buy your replacement property of equal or greater value.
  • The next benchmark is you have to reinvest all of your equity or net proceeds into that new replacement property.
  • Finally, to the extent that you are discharged or relieved of debts associated with the relinquished property, you need to acquire a replacement property and take out new debt sufficient to offset the old debt relief. Or if you're flush with cash you can also invest additional cash out of your pocket to offset some or all of that debt relief.

Potential Problems

The problem comes when people sell their relinquished property and they engage in seller-backed financing. Perhaps the buyer doesn't have enough money for the down payment and they say to you “hey why don't I borrow $10,000 or $15,000 from you and I'll give you a note at the time of closing for that amount?"

Well if the seller that's doing the exchange receives any property other than like-kind real estate as part of the exchange that is called boot, and boot is taxable. If the seller receives a note for $10,000 or $15,000 they’ve just received $10,000 or $15,000 worth of boot.

Insulating the Seller

In order to insulate the seller from receiving that boot we would have all of the proceeds (both the cash and the non-cash proceeds) go to the qualified intermediary so that it can be applied for the purchase of the new replacement property. If the seller of the new replacement property likes the idea of receiving the cash but isn't so enthralled with receiving the note you can then have the exchangor substitute in cash into the exchange account for the face value of the note so that the intermediary has all cash in the exchange account to apply for and use to purchase the replacement property.

  • 1031 Hotline: If you have questions about 1031 accounting requirements, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved