Tax Consequences - Liabilities & Boot

Liabilities
After transfer property is surrendered, the parties involved in the like-kind exchange will need to prepare a written document that identifies the property exchanged within 45 days of the transfer. It must then be transferred within 180 days.

Like-kind favorable tax treatment is barred if you fail to:

  • Indentify property in writing 45 days after the transfer
  • Receive the exchanged property within 180 days

Boot
In the like-kind exchange, there is often other property or cash that is exchanged in the transaction along with the like-kind property to equal the value of the deal for both parties involved. This other property that is not of the "like-kind," is often referred to as the "boot." The most common form of boot is cash, but many other types of boot are used.

Receiving the "boot" will:

  • Result in the recognition of gain if there's a realized gain.
  • Result in no recognition if there's a realized loss.

*IMPORTANT*

Three figures are needed to calculate realized gain, recognized gain and substitute basis:

  1. Fair market value (FMV) of property received
  2. Adjusted basis of property given up
  3. Boot (any other property besides the like-kind property)

(Exam will give you several other figures to throw you off track)

Example:
Andy (net worth is $2 million) is going to exchange a vacant land lot for another tract of land from Joan (like-kind exchange). Andy's lot has an adjusted basis of $50,000 and a FMV of $150,000. Joan's lot has an adjusted basis of $40,000 and a FMV of $100,000. Joan is also giving the "boot" to Andy in the form of $30,000 cash to seal the deal.

Calculate the realized gain, recognized gain and substitute basis to Andy if any?

  • FMV of property received? $100,000
  • Adjusted basis of property given? $50,000
  • Boot? $30,000

Step 1

Realized Gain


= [FMV of acquired land + Boot] minus adjusted basis of land given up

= [$100,000 + $30,000] - $50,000

Realized Gain = $80,000

Step 2

Recognized Gain = boot received OR the realized gain (whichever value is less)

Recognized Gain = $30,000

Step 3

Adjusted Basis of New Property

= FMV of new property – [Realized gain minus Recognized gain]

= $100,000 minus [$80,000 - $30,000]

New Adjusted Basis = $50,000

Special Notes for boot:

  • If you transfer mortgaged property, the amount of the mortgage is part of the boot.
  • If the boot was received and you incurred a loss on a like-kind exchange, the loss is generally non-deductible (un-like property exchanges might allow the loss deduction).
  • The calculation of the boot, gain or loss and basis of property received can all be computed on Form 8824.
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