Beware Hidden "Boot" Risks In A 1031 Exchange

One of the golden rules of 1031 exchanges is that if you receive any cash out of the transaction, it is considered “boot” and subject to capital gains taxes. Most investors understand this.

But there is one element of “boot” that often catches investors off guard, and it has to do with mortgages and other debt. If you fail to consider outstanding loans during the 1031 transactions, you can find yourself facing unintended taxes on unexpected boot. How so?

If you don’t receive cash back but do see your liability go down, the reduction in debt will be treated just like cash. Let’s say you had a mortgage of $1,000,000 on your old property, but the new property you acquire only has a $900,000 loan, you will have $100,000 of gain that is taxable as boot.

Be sure you take any debt and mortgages into consideration when structuring your exchange.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.