What Does Boot Refer to in an Exchange?
The term boot is commonly used when discussing the tax consequences of an exchange. Boot is anything that is not considered “like-kind” that the taxpayer receives in an exchange. 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. There are two categories of boot, mortgage boot or cash boot. Mortgage boot refers to the liabilities assumed by the taxpayer. Mortgage boot occurs when the exchanger reduces a loan or debt from one property to the other. Cash boot is any cash that the taxpayer receives once the exchange is finalized. It is also important to remember that relief of debt is a taxable event. Here are examples of mortgage and cash boot.
Cash Boot
Ms. O’Connell has paid off the mortgage on her property with a value of $100,000. She enters into an exchange and purchases a property with a value of $90,000. Ms. O’Connell receives the remaining $10,000 in cash at the end of her exchange. She receives cash which is cash boot, and Ms. O’Connell will have to pay taxes on the $10,000.
Mortgage Boot
Ms. O’Connell exchanges her property with a value of $100,000 and a mortgage of $50,000. She purchases her replacement property for $90,000 and takes out a loan of $40,000. Because Ms. O’Connell initially had a loan for $50,000 and ultimately ended up with a $40,000 loan, $10,000 less, she has $10,000 in mortgage boot. Even though she never received any cash from the exchange, the mortgage boot is subject to a capital gains tax.
Cash boot can also occur in transactions that involve debt. Suppose a taxpayer places more debt on the replacement property than there was on the relinquished property. The funds held by the Qualified Intermediary are not all used, resulting in excess funds. In that case, the taxpayer will receive the taxable boot. For example:
Ms. O’Connell exchanges her property with a value of $100,000 and a mortgage of $40,000. She purchases a replacement property with the same value of $100,000. Ms. O’Connell takes out a loan of $50,000 and uses $50,000 of the $60,000 held by the qualified intermediary to purchase the replacement property. Although Ms. O’Connell exchanged her property for another of the same value, the $10,000 cash left in the exchange account that she receives is cash boot and considered taxable gain.
Boot Netting Rules
Certain types of boot may cancel out each other, which will lessen their overall impact and reduce the taxable gain. Boot netting rules include:
Cash boot paid on the acquisition of replacement property offsets cash boot received on the disposition of the relinquished property. Cash boot spent on the purchase of the