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Study Notes on Exchanges
IV. Section 1031 Exchange (Boots)
The taxpayer exchanges property solely for qualifying like-kind property.
The receipt of non-qualifying property in an exchange.
No, tax deferral of gain will be partially applicable.
The taxpayer will recognize gain to the sum of cash and fair market value of the non-like kind property received.
(Note: This is the maximum amount of gains that can be taxed.)
1). First, determine the fair value of unlike property received plus cash or money received.
2). Second, the amount of gain in the whole exchange.
3). The taxable gain is the lesser of First 1). or Second 2).
Existing liens, encumbrances, and mortgages upon the real property.
Cash, checks, or other cash equivalents.
Furniture and furnishings and all other personal property transferred as part of an exchange for real property.
Security liens upon property.
Third-party promissory notes or other evidence of indebtedness, whether secured or unsecured, owed by a third party to one of the parties to the exchange and transferred to the other as part of the consideration of the exchange.
Any promissory note or other evidence of indebtedness, whether secured or unsecured, executed by one party to the exchange in favor of the other party or to a third person for the benefit of the other party.
Property held primarily for sale or used by the taxpayer as his or her residence.
Realized gain is the excess of the amount realized from a transaction over the adjusted basis of the property disposed of in the same transaction.
The amount realized is the sum of any money received plus the fair market value of the property (other than money) received.
The gains must be reported for income tax purposes.
Without the benefits of 1031, all gains will be realized and recognized.
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V. Section 1031 Exchange (Boot Treatments)
A taxpayer is given or received qualified property in Section 1031 and also the taxpayer is either given or received 1). money or personal property, or 2). received or given property not qualified under Section 1031, or 3). assumes a liability of the other party; or 4). acquires property in the exchange that is subject to a liability
Property and mortgage boot.
A taxpayer receiving cash, non-like-kind, or personal property is considered receiving property boot.
Liabilities assumed or taken subject to in the exchange.
The relief of debt is considered equivalent to a receipt of cash.
Property boot but not mortgage boot.
It can be offset by any boot received.
It can only be offset by mortgage boot received.
The brokerage commission paid is considered property boot paid. Since this is considered property boot paid, it can be offset from property boot received, mortgage boot received, or both.
It is either the total realized gain or the total amount of net boot received, whichever is less.
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VI. Section 1031 Exchange (Loss)
No, gain or loss will not be recognized for like-kind assets in exchange.
Qualifying and non-qualifying.
It is treated as a sale.
Gain or loss will recognize.
- Consider two transactions.
- One is considered a sale, and the other one is a like-kind exchange.