Replacement Value for 1031 Exchange

In order to defer 100% of the capital gains taxes in an exchange, a taxpayer should replace with like kind property of equal or greater value than the relinquished property. But that doesn't mean you taking cash or reducing debt will invalidate your 1031 exchange. It simply means you will be responsible for taxes on any cash taken or debt not replaced. This is known as "boot".

You may choose to take some cash out (cash boot) or to incur less debt on the replacement property (debt boot) than was attached to the relinquished property. Cash boot must be taken at the closing of the sale of the relinquished property or when the exchange is complete. The rules of boot can be complicated and even among accounting professionals, treatment of boot can differ. Consult with your tax professional about the allocation to depreciation recapture and capital gain income on the boot.

Care should be taken as to the amount of boot you hold from the exchange. Taxes will be assessed on the amount of the boot taken OR the total gain on the sale, whichever is less. The boot taken must be less than the total gain to result in an actual tax deferral.

It is wise to go over the numbers with your tax professional BEFORE deciding to receive boot in an exchange. If you or your accounting professional have questions about the Rules of Boot, you might find it helpful to review the information about it on our website or give us a call, toll free, at 888-367-1031.