Discussion:1031 mortgage question
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Discussion Forum Index --> Advanced Tax Questions --> 1031 mortgage question
Discussion Forum Index --> Tax Questions --> 1031 mortgage question
| 28 June 2008 | |
| Would appreciate help from you all regarding this 1031 case that I am working on right now:
Exchange Expenses = $36,349 Relinquished property: Value=$412,500 Mortgage=$132,181 Therefore, Equity=$280,319 Replacement Property: Value=$550,300 Mortgage***=$406,000 or $318,885 -- not sure (difference = $87,115, see notes below) Therefore, Equity=$144,300 or $231,415 Based on the above.... (1) If I use $406,000 as the new mortgage, net boot received = 280319-144300-36349=99670 (2) If I use $318,885 as the new mortgage, net boot received = 280319-231415-36349=12555 (i.e. we prefer this of course) I am uncertain which mortgage value to use for the replacement property because the mortgage included $87,115 that was at the end held by the bank for construction after the fact. We have established that the construction was not part of the exchange (i.e. this was not a construction exchange). The money held by the bank at the end will be used to reduce the mortgage amount if not used for construction -- i.e. will not be given to the taxpayer as cash. My way of thinking is, since we have no constructive receipt of this $87115 held by the bank solely for construction, I can use $318885 as the new mortgage amount on the replacement property. Is my thinking straight??? Please HELP!!!! Thank you SOOOOOO...much. | |
| 28 June 2008 | |
| Unless this exchange involves mortgage assumptions, you should basically ignore mortgage balances when computing boot. Boot includes nonqualifying property received from the other party to the exchange. Boot does not include nonqualifying property received from the lender.
In this particular exchange (presuming no mortgage assumptions), your client will give $137,800 in cash to the other party to the exchange, and will not receive boot from the other party to the exchange. | |
| 29 June 2008 | |
| Thank you so much for the pointers Riley! Unfortunately, I am not sure if I understood you. No cash was contributed by my client in the exchange. The mortgage figures I indicated were mortgages of my client, one on the relinquished property before the exchange (paid off during the exchange) and one on the replacement property after the exchange.
The way I understand boot calculation is: Gross Boot = Mortgage Boot + Equity Boot In my particular exchange, - No mortgage boot since the mortgage amount increased - Decrease in Equity created Equity Boot, subject to possible tax consequences Is my understanding correct? I feel that with 1031 exchanges, the more I know the more I feel I don't know. In any event, my question is, if the mortgage my client took out on the replacement property was partially kept by the lender at the end instead of being used in the exchange ($87K), shouldn't I reduce the mortgage amount by this $87K when I calculate Equity boot? I'd appreciate any feedback. Thanks a million! | |
| 29 June 2008 | |
| Your client did in fact give $137,800 to the other party to the exchange. Believe me, you would have heard from the other party to the exchange by now (the QI) if that equalizing payment had not been received. Mortgage boot is almost nonexistent in today's economic environment. This is due to the fact that the only way you can have mortgage boot is to have a mortgage assumption (almost never happens).
All of my answers would change if there were mutual assumptions of existing debt. | |
