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Do a Reverse Exchange
A properly structured exchange is the transfer of property for property, thus deferring capital gain taxes. Any cash received, any reduction in mortgage or any other non-like-kind property received is considered "boot" and is taxable to the extent of the capital gain. To fully defer all capital gain taxes, an Exchanger must meet two requirements:
Reinvest all exchange proceeds
If an Exchanger does not reinvest all exchange proceeds from the sale of the relinquished property, the balance received is considered "cash boot", and gain may be recognized on that amount.
Acquire property with the same or greather debt
If an Exchanger does not acquire a replacement property with an equal or greater amount of debt, he or she is relieved of a debt obligation, which is considered "mortgage boot". The IRS considers this reduction in debt a benefit to the Exchanger; therefore, it is taxable, unless it is offset by adding equivalent cash to the replacement property purchase.
How it works
| | Example I | Sale | | | Purchase | Boot | |
| Sale price | $ 450,000 | | Purchase price | $ 600,000 | | |
| - Debt | - $ 200,000 | | New Debt | $ 380,000 | 0 | |
| - Cost of Sale | - $ 30,000 | | | | | |
| Exchange Proceeds | = $ 220,000 | | Down Payment | $ 220,000 | 0 | |
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Analysys
Since the Exchanger acquired $180,000 more debt and reinvested all the net ecquity, the tax is fully tax deffered.
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| | Example II | Sale | | | Purchase | Boot | |
| Sale price | $ 450,000 | | Purchase price | $ 360,000 | | |
| - Debt | - $ 200,000 | | New Debt | $ 160,000 | $40,000 | |
| - Cost of Sale | - $ 30,000 | | | | | |
| Exchange Proceeds | = $ 220,000 | | Down Payment | $ 200,000 | $20,000 | |
| Total Boot | $60,000 | |
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Analysys
Since the Exchanger only acquired $160,000 of debt, there is $40,000 of mortgage boot. Additionaly, the Exchanger did not reinvest $20,000 of the net equility, which results in $20,000 of cash boot. The combined amounts ($40,000+$20,000) equate to $60,000 in boot, which is taxable.
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Information Provided by
Asset Preservation, Inc.
National Headquarters: 800-282-1031 or info@apiexchange.com
This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or tax counsel.
© 2000 Asset Preservation, Inc.
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