Tax Consequences - Liabilities & Boot
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
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.
Three figures are needed to calculate realized gain, recognized gain and substitute basis:
- Fair market value (FMV) of property received
- Adjusted basis of property given up
- Boot (any other property besides the like-kind property)
(Exam will give you several other figures to throw you off track)
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
= [FMV of acquired land + Boot] minus adjusted basis of land given up
= [$100,000 + $30,000] - $50,000
Realized Gain = $80,000
Recognized Gain = boot received OR the realized gain (whichever value is less)
Recognized Gain = $30,000
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.