Trade Talk
By Mark Neuman, CPA, CES®
Trade Talk is a quarterly column intended to define and demystify exchange terminology. New terms will be defined in each quarterly issue of the Summit Exchange.
Boot
If you receive any assets from an exchange that are not like-kind to the property you originally exchanged, they are called “Boot”. There are different types of Boot, but all Boot is taxable. The most common types of Boot are “Cash Boot” and “Mortgage Boot”. Cash Boot is where you receive extra cash in the deal, no matter if the replacement property is of higher value than what you exchanged. Mortgage Boot occurs if you get debt relief with a lower mortgage on your new property – UNLESS you put more cash down on the new property to offset the reduced debt amount. Boot can also be in the form of property. For instance, personal property, like furniture, would be boot if it were received as part of the replacement property in an exchange from real property.
Simultaneous Exchange
Although most exchanges done today are delayed exchanges, simultaneous exchanges still occur. In a simultaneous exchange, the exchanger sells property and buys replacement property within the same transaction on the same day. If two parties are involved, each party owns a property the other would like to own and they merely exchange their properties. In a three party exchange, the exchanger may want a certain property, but the seller may not want the exchanger’s property. If the exchanger can find a cooperative buyer to first buy the replacement property from the seller, the exchanger could then exchange properties with the buyer. The other option is for the exchanger to first exchange properties with a cooperative seller, who then would sell the exchanger’s original property to the buyer. In addition to these timing, cooperation and coordination complications, there are other problems with simultaneous exchanges:
· If the exchanger’s equity were higher than the equity on the property traded for, typically the exchanger would receive cash to make up the difference resulting in taxable cash boot. (See the definition for boot above).
· Even if the equities match up, if the fair market value (FMV) of the property received is lower than the FMV of the property given up, the difference would result in taxable mortgage boot to the exchanger.
The bottom line – be careful with simultaneous exchanges. Some exchangers unknowingly recognize capital gains because the exchange isn’t thoroughly thought out. Because of the potential problems, many escrow companies require the exchanger to work through an accommodator under a delayed exchange format.
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Mark Neuman is a co-owner of Summit Accommodators, Inc. based in Bend, OR. He has over 20 years experience as a CPA and over 13 years 1031 exchange experience. Mark was one of the first members of the Federation of Exchange Accommodators (FEA) to pass the Certified Exchange Specialist® exam. Contact Mark at mark@summit1031.com