Mortgage Boot in a 1031 Exchange refers to cash or debt relief received by the taxpayer during an exchange, in addition to the transfer of property. For example, if the taxpayer sells a property for $500,000 and has a mortgage of $200,000, and takes back a $220,000 mortgage from the buyer, the taxpayer has received $20,000 of “mortgage boot” in the form of debt relief.
Key-Takeaway
- Mortgage Boot is taxable to the taxpayer, as it is considered a taxable event.
- To avoid paying taxes on mortgage boot, the taxpayer must “roll over” the mortgage boot into the acquisition of replacement property in a 1031 Exchange.
- The taxpayer must replace the entire debt, not just the mortgage boot, in order to defer paying taxes on the entire amount.
Tips
- It is recommended to consult a qualified intermediary or tax professional to ensure compliance with the 1031 Exchange rules and regulations.
- When planning a 1031 Exchange, it is important to carefully consider the amount of mortgage debt on the property being sold, as well as the amount of mortgage debt on the replacement property being acquired.
Recommendations
- Consider the amount of mortgage boot in the transaction, and whether it can be deferred by completing a 1031 Exchange.
- Consider the tax implications of mortgage boot, and whether it is worth completing a 1031 Exchange to defer paying taxes on the mortgage boot.
- Seek the advice of a qualified intermediary or tax professional to ensure a successful and compliant 1031 Exchange.
