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Tax Mitigation Playbook: What is “Boot” in a 1031 Exchange?

Financial Planning Dentist

The term boot is commonly used when discussing the tax consequences of an exchange. However, the term “boot” is not used in the Internal Revenue Code or the Regulations. Which is a source of confusion.

The “Boot” received is the money or the fair market value of “other property” received by the taxpayer in an exchange. You will be taxed on this portion – clients that work with our CFP’s® determine if that boot is the right amount to take inside of their InSight-Full® financial plan. 

Unlike property or non-qualifying property such as securities, cash, notes, partnership interests, etc. A taxpayer who receives boot (“unlike” property) will have to recognize gain to the extent of the net boot received or realized gain, whichever is less. 

This is Key:

In exchanges, there are two types of boot: 1) cash boot and 2) mortgage boot. Boot is anything that is not considered “like-kind” that the taxpayer receives in an exchange. 

Cash Boot:

This could include cash, property other than real property, or net debt relief. Any boot the taxpayer receives is regarded as taxable gain and will trigger a taxable event. Cash boot is any cash that the taxpayer receives once the exchange is finalized.

Mortgage Boot:

This version of boot is a debt instrument that is secured by real estate collateral that the borrower is obligated to pay back over a period of time with a predetermined set of payments, which include both the loan and interest. A mortgage boot occurs when the exchanger reduces a loan or debt from one property to the other.

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