Boot
Definition and meaning of Boot in real estate.
Boot is cash, debt relief, or other non-like-kind property received by a party during a tax-deferred property exchange. In a typical Section 1031 exchange, boot represents the taxable portion of the transaction that occurs when the properties being traded are not of equal value.
In more detail
When investors trade properties of unequal value under Section 1031 of the Internal Revenue Code, the difference is made up with cash or by assuming a smaller mortgage. This extra value is the boot, which is subject to capital gains tax in the year of the exchange.
To avoid paying tax on the exchange, an investor must reinvest all proceeds into the replacement property and take on equal or greater debt. Understanding boot is essential for real estate investors and agents who want to minimize tax liabilities during transactions.
Key facts
| Category | Real Estate Investing |
|---|---|
| Also known as | Net cash received or debt relief |
| Tax status | Taxable as capital gains |
| Common scenario | Section 1031 exchanges |
An investor exchanges an apartment building worth one million dollars for a commercial retail building worth nine hundred thousand dollars and receives one hundred thousand dollars in cash to balance the transaction. The one hundred thousand dollars in cash is considered boot and is subject to taxation.
Frequently asked questions
Does debt relief count as boot?
Yes, if the mortgage you assume on the new property is lower than the mortgage on the property you sold, the difference is considered mortgage boot and is taxable.
Can you avoid paying taxes on boot?
You can offset boot by paying transaction costs, such as closing fees, or by reinvesting all of your cash proceeds and maintaining a similar level of debt on the new property.