Discussion:1031 Exchange - Boot?

Relinquished Property: FMV(Sale Price) = $180,800; Mortgage paid off at closing = $48,641; Adjusted Basis: $38,410.

Replacement Property: FMV(Purchase Price) = $207,765; New Mortgage: $111,525;

Expenses incurred for the exchange: $15,688.

I am getting $20,321 in boot. Is this correct? The spreadsheet is taking the difference in equity ($36,009) and subtracting the expenses. ($36,009 - $15,688 = $20,321)

No, adjusted basis is not necessary to answer question.

First of all, there was not a mutual assumption of mortgages, and secondly, the fmv of the relinquished property is not higher than the fmv of the replacement property.

If done properly, the exchange worksheet will show $51,697 in boot given.

If the selling price of the relinquished property is $180,800, the mortgage payoff is $48,641, the selling expenses are $15,688, then cash received from sale = $116,471. If $96,150 was paid toward purchase of replacement property, then $20,321 ($116,471 - $96,150) is net cash (boot) received. Is this not correct?

In the context of Sec. 1031, cash received means cash received from the other party to the exchange -- not cash received from the bank. Example, if I exchange an unencumbered piece of land with an fmv of $90,000 for a piece of land with an fmv of $120,000 and a new loan of $120,000, I will receive $90,000 in cash at the close of escrow. However, I have actually given $30,000 to the other party to the exchange, resulting in a completely tax-deferrred exchange.

TaxTools has a 1031 worksheet that works well if you haven't already tried it.

ReadMyLips, the equity analysis involves looking a the net equities received and transferred. In the normal case, the net equity transferred to the other party to the exchange is the fair market value of the property since the other party to the exchange will ordinarily require that the encumbrances be extinguished prior to title transfer.

In other words, the net equity analysis is useful when there are assumptions of debt. If the original fact pattern involved mutual assumptions of existing debt, then there would indeed be $20,231 in boot. However, in this case, the taxpayer's debt load doubled, but he only walked away with $9,500.

Tax Tools is excellent; however, you must be able to distinguish between loan assumptions, loan pay-offs, and new loans.

Also, in your example above, the $90,000 received at closing is not recognized?

To carry this one step further, the realized gain for my client would be $90,693 and the recognized gain would be $0?

See Example #2 at Reg § 1.1031(k)-1(j)(3). In this example, the exchanger receives $10,000 of cash boot at the time of the sale. He contributes the $10,000 later at the time of repurchasing the replacement property. The sale price of the relinquished property and the purchase price of the replacement property are both $100,000. Therefore, net equity of zero. However, the Regs state that the exchanger must recognize the $10,000 that he received as boot. If you input this example into the Like-Kind Exchange Worksheet in Tax Tools, the program shows that there is no gain.

• How much cash passed through the QI?
• Of the $15,688 of selling expenses, how much was incurred in each separate transaction?
• Also, be sure that what you are calling selling expenses are not, in fact, boot. A proration of rent or property taxes is not a selling expense. This is boot.

Cash boot paid offsets Cash boot received Debt boot paid offsets Debt boot received Cash boot paid offsets Debt boot received Debt boot paid DOES NOT offset cash boot received

Boot netting is a carryover idea from Simultaneous Exchanges. The deferred exchange rules brought about the constructive receipt rules. And in those rules, you cannot undo the constructive receipt of Cash boot received.

The only boot netting allowed in the Deferred Exchange rules is (1) the netting of Debt boot received against Debt boot given and (2) the netting of Debt boot received against Cash boot given. But Cash Boot received cannot be netted against nothing. This is constructive recipt.

FYI: I am using the worksheet from the book "An Accountant's Guide to Like-Kind Exchanges". Author is Gary Hoff, E.A. It was recommended by another poster here. It is available from the University of Illinois at http://www.taxschool.uiuc.edu/products.html#likekind.

Using this worksheet, I too keep coming up with a recognized gain of $20,321. The worksheet refers to this as "Cash received (to balance equities). The amount to "balance the equities" is $36,009. From this, it is deducting the "Expenses incurred for the exchange" or $15,688. It then treats this net amount as boot received.

Does anyone agree with the $90,693 of realized gain?

Sales price $180,800

Less Adj Basis $38,410

Less Exchange exp $15,688

Realized gain $126,702

Riley, By this statement you are suggesting that boot-netting IS allowed provided the exchanger is using a QI and the safe-harbor language exists. Reg §1.1031(k)-1(f)(2) disagrees.

The taxpayer is in actual receipt of money or property at the time the taxpayer actually receives the money or property or receives the economic benefit of the money or property. The taxpayer is in constructive receipt of money or property at the time the money or property is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it...

Any cash boot that is paid directly to (or for the benefit of) the seller from the sales proceeds is the constructive receipt of boot. Classic examples of this is the use of sales proceeds to credit the buyer for rent prorations, security deposits & property taxes. Or the very common example of using the sales proceeds to pay the accrued interest on the mortgage.

Riley, you are suggesting that the exchanger can fix this by putting money back into the exchange. Impossible. Once received, this is boot.

Also, see Reg §1.1031(k)-1(g)(4)(vii).