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BOOT AND BASIS
The Regulations provide that if an exchange would be within the provisions of
Code Section 1031(a) except for the fact that the property received consists of qualifying
property and other property or money, the gain, if any, to the recipient is
recognized to the extent of the sum of money and the fair market value of "other
property" received.
This "money or other property" is commonly called "boot" and includes
liabilities assumed or attaching to property received in an exchange.
"Other Property" is either property specifically excluded (e.g., stock in trade,
notes, chooses in action, or partnership interests) or property which is not
of like-kind with property surrendered in the exchange.
Consideration given in the form of cash or other property is netted against
consideration received in the form of an assumption of a liability or a transfer
of property subject to a liability.
Consideration received in the form of cash or other property is not, however,
netted against consideration given in the form of an assumption of liabilities
or a receipt of property subject to a liability.
BOOT: NETTING RULES
1. Cash paid on the acquisition of Replacement Property
offsets cash received on the disposition of Relinquished Property.
2. Cash paid on the acquisition of Replacement Property offsets debt relief on
the disposition of Relinquished Property.
3. Debt assumed on the acquisition of Replacement Property offsets debt relief
on the disposition of Relinquished Property.
4. Debt assumed on the acquisition of Replacement Property will not offset cash
received on the disposition of Relinquished Property.
See Code Section1031(b), (c); Treas. Reg. §1.1031(a)-1, (b)-1, (d)-1, (d)-2.
CASH BOOT EXAMPLES:
|
Relinquished Property |
|
| Market Value |
$60,000 |
| Adjusted Cost Basis |
30,000 |
|
Replacement Property |
|
| Market Value |
$50,000 |
| Adjusted Cost Basis |
10,000 |
Taxpayer has realized gain of $30,000 on the disposition of
Relinquished Property but is required to recognize gain of only $10,000- cash
received in the exchange.
LIABILITIES AS BOOT:
|
Relinquished Property |
|
| Market Value |
$90,000 |
| Debt |
30,000 |
| Equity |
60,000 |
| Adjusted Cost Basis |
40,000 |
|
Replacement Property |
|
| Market value |
$66,000 |
| Debt |
6,000 |
| Equity |
60,000 |
Taxpayer has realized gain of $50,000 on the disposition of
Relinquished Property but is required to recognize gain of only $24,000 net debt
relief.
SUBSTITUTE BASIS COMPUTATION
The basis of property received in an exchange is equal to the
adjusted basis of property surrendered, plus the net increase or minus the net
decrease in debt, minus the net cash received or plus the net cash paid, plus
the amount of gain recognized in the exchange. This is known as "substitute
basis".
Code Section 1031(d); Treas. Reg. §1.1031(d)-1.
BASIS COMPUTATION
|
Relinquished Property |
|
|
Market Value |
$75,000 |
| Adjusted Cost Basis |
50,000 |
|
Replacement Property |
|
| Market Value |
175,000 |
|
Less: Cost Basis |
50,000 |
|
| Cash Paid |
100,000 |
150,000 |
| Gain Realized |
25,000 |
| Gain Recognized |
-0- |
| Basis of Relinquished
Property |
50,000 |
| Plus: Cash Paid |
100,000 |
| Plus: Gain Recognized |
-0- |
| Substitute Basis |
150,000 |
BASIS COMPUTATION WITH
MORTGAGES
|
Relinquished Property |
|
| Market Value |
$500,000 |
| Debt |
200,000 |
| Adjusted Cost Basis |
100,000 |
|
Replacement Property |
|
| Market Value |
500,000 |
| Debt |
300,000 |
| Gain Realized |
400,000 |
| Gain Recognized (cash
received) |
100,000 |
|
Substitute
Basis Computation |
|
| Adjusted Cost Basis of Relinquished
Property |
100,000 |
| Plus: Net Increase in Debt |
100,000 |
| Less: Net Cash Received |
-100,000 |
| Plus: Gain Recognized |
100,000 |
| Substitute Basis in Replacement
Property |
200,000 |
|
Relinquished Property |
|
| Market Value |
500,000 |
| Debt |
250,000 |
| Adjusted Cost Basis |
100,000 |
|
Replacement Property |
|
| Market Value |
500,000 |
| Debt |
200,000 |
| Gain Realized |
400,000 |
| Gain Recognized |
-0- |
|
Substitute Basis Computation |
|
| Adjusted Cost Basis of Relinquished Property |
100,000 |
| Less: Net Decrease in Debt |
-50,000 |
| Plus: Net Cash Paid |
50,000 |
| Plus: Gain Recognized |
-0- |
| Substitute Basis in Replacement Property |
100,000 |
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