1031 boot, how is tax figured?

Question

Can someone give me a *rough* idea how I can expect any boot from my 1031 exchange to be taxed?

I know the general taxes involved (long-term capital gains, state income tax in GA (I think), depreciation recapture). But obviously not all of what’s in the exchange is gains (didn’t manage to buy at zero and put in nothing).

So if I do end up having some boot, do I somehow apportion it between the part of the sale that was “gain” and the part that’s just “getting back what I put in”?

To add that little extra factor, a total of 11 properties were sold to fund the exchange.

Know I can ask my CPA but just looking to get a rough understanding now.

Edit: sorry, meant to post in 1031 forum but cannot find a way to move or delete.

Thanks,

Allen

Dave Foster · Answer

@Allen B. pasted answer to the same question already posted -

Since the reinvestment requirements to fully defer all tax and depreciation recapture are that you purchase at least as much as your net sale and use all of your cash proceeds that means that any amount you take in cash or any amount you purchase less than your net sale is going to be taxable until you've reached the full amount of your gain withdrawn as boot.

So the amount that will be taxable is predictable.  What you need your accountant to pull together is

1. The total gain in all the properties of that portfolio;

2. The total amount of depreciation taken

3. Will he be willing to call the first dollar of boot profit or depreciation recapture.

Once you've got this bit then you can apply the tax rates that are appropriate for the type of gain it is.

I don't know how much boot you're taking.  But unfortunately you may find that given the reinvestment requirements you may have been better off carving out one or two of those properties from the 1031 and paying the tax on all of that gain.  The rest of cash generated from the sale would have then been simply a nontaxable return of capital.  Since they're all included in the exchange, 100% of the cash you take out is going to be taxable until you take out the entire amount of your gain.

Wayne Brooks · Answer

The boot will not be ordinary income. There is no allocation of “getting your purchase price back...all boot is taxed up until all of your gain/depreciation recapture totals. I don’t know how the boot is allocated between capital gain verses depreciation recapture.

@Dave Foster??

John Teachout · Answer

So are you saying you did a 1031 exchange but the new property(s) did not cost as much as the ones you sold?

Tina Tsysh · Answer

Usually any boot is reported on line 15 of Form 8824 Like-Kind Exchanges and is taxed at your ordinary tax rates. Your money that you "put into" the property is going to be accounted for in the "re-sale" price, thus your boot is most likely going to be taxed as ordinary income. Definitely talk to a CPA tho!

Allen B. · Answer

Thanks, everyone, for the quick and helpful answers. I’m not planning on any boot at all (beyond incidentals) but one of the two buildings I’ve got under contract turns out to have rather more significant issues than anticipated.

As a result, I’m having to consider whether to proceed and deal with the unanticipated costs or back out and either identify a couple of potential replacements knowing that the identification period will close before I can fully vet them, or take the tax hit.

At the moment, not a huge fan of the entire 1031 process.

Thanks,

Allen

1031 boot, how is tax figured?

Most Popular Reply