What Is Taxable Boot in a 1031 Tax Deferred Exchange?

The term taxable boot refers to any non-like kind property received in a 1031 Tax Deferred Exchange.  For example, if you are selling real estate that was held for rental, investment or use in a business, then non-like kind property would be any type of property that is not real estate held for rental, investment or use in a business.

The term cash boot refers to the receipt of cash.  In other words, you end up with cash left over after you have completed the acquisition of your replacement properties in your 1031 Tax Deferred Exchange. 

The term mortgage boot (also called debt relief or mortgage relief) means that the taxpayer has traded down in the value of replacement properties acquired and therefore has less debt on the replacement properties than what he or she had on the relinquished properties even though he or she reinvested all of his or her cash equity.

Happy 4th of July!

The staff at The Exeter Learning Institute wishes you and your family a very happy and safe 4th of July holiday.

Last Minute 1031 Exchange Closing Tip

I was speaking to one of my clients today who is trying to close on the sale of her relinquished property before the end of the month - June 30, 2010.  I realized as we were discussing her 1031 Exchange transaction that she really did not have any specific reason for closing by the end of the month. 

I suggested that she wait and close on the sale of her relinquished property and start her 1031 Exchange after June 30, 2010 instead of before month end.  The reason is simple.  You never know whether you will be able to complete your 1031 Exchange.  The sale of your relinquished property and the start of your 1031 Exchange triggers your capital gain tax.  Your 1031 Exchange will fail if you can not acquire replacement property with the 180 calendar day exchange period, and the failed 1031 Exchange becomes a taxable transaction.

However, your taxable gain can be pushed into the following tax year if you do not have the right to your 1031 Exchange funds until after your 180 calendar period has passed and the 181st day lands in the following tax year.  This is the reason that I recommended that she wait to close on the sale of her relinquished property until July 2010.  Closing after month end would push her 180th day into 2011 and would at least allow her to defer her capital gain into 2011 even if her 1031 Exchange fails.  This is a little known tax planning tool that is relatively easy to implement unless you absolutely need to close by month end for other reasons. 

Transaction Closing Saved by the Cash Holding Escrow

The parties involved in the purchase, sale and refinance of real estate are often confronted with obstacles that can hold up the closing of the real property transaction. One solution is to have the parties agree to have cash held back at the transaction closing in a Cash Holding Escrow or Cash Holdback Escrow pending the resolution of the problem. Cash or closing proceeds can be set aside and held by an independent third party or escrow agent until the pending items are completed or conditions have been met or resolved.

The Cash Holding Escrow or Cash Holdback Escrow is a very simple escrow solution to an often complicated problem. These problems often arise at the last minute and can delay, complicate or even result in the cancellation of some already fragile real estate transactions.

Putting a Cash Holdback Escrow or Cash Holding Escrow in place at the last minute can save these transactions. But, many independent escrow companies, title insurance companies, trust companies, banks and other financial institutions will often decline to administer these Cash Holding Escrows or Cash Holdback Escrow account transactions because they do not have adequate systems to track the various requirements for the Cash Holdback.

Emissions Credits are Classified as Like Kind Property for 1031 Exchange Purposes

Like kind property as defined for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code is not always an easy call to make and often involves grays areas until the IRS clears up the issue for us. 

This is the case for Nitrogen Oxide Emissions (NOx) and Volatile Organic Compounds (VOC).  The question was whether they were like kind to each other for 1031 Exchange purposes.

The Internal Revenue Service issued Private Letter Ruling (PLR) 201024036 today, which concludes that the underlying nature and character of the rights conferred by emissions credits for nitrogen oxide emissions (NOx) are like-kind to the rights conferred by emissions credits for volatile organic compounds (VOC). 

The Internal Revenue Service concluded in PLR 201024036 that the underlying nature and character of the emission credits were of like-kind property to each other and therefore qualified for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code.