WHAT ARE THE REQUIREMENTS FOR FULL TAX DEFERRAL IN A 1031 EXCHANGE?
- AND -
TAX DEFERRAL AND CAPITAL GAIN CALCULATIONS ARE DIFFERENT.
Some real estate investors confuse what is required for full tax deferral
in an exchange with calculations involved in determining their accumulated
capital gain. The requirements for full tax deferral are different
than the capital gain tax and/or basis computations. The formulas
for calculating a capital gain tax liability can be found in Asset
Preservation's handout entitled "Calculating Your Capital Gain."
WHAT ARE THE REQUIREMENTS FOR FULL TAX DEFERRAL IN AN EXCHANGE?
If an Exchanger intends to perform an exchange that is fully tax deferred,
they must meet two simple requirements:
(1) Reinvest the entire net equity (net proceeds) in one or more replacement
(2) Acquire one or more replacement properties with the same or a
greater amount of debt. An alternative approach for complete tax deferral
is acquiring property of equal or greater value and spending the entire
net equity in the acquisition. One exception to the second requirement
is that an Exchanger can offset a reduction in debt by adding cash
to the replacement property closing.
WHAT IS "BOOT?"
The term "boot" refers to any property received in an exchange that
is not considered "like-kind." Cash boot refers to the receipt
of cash. Mortgage boot (also called "debt relief") is a term
describing an Exchanger's reduction in mortgage liabilities on a replacement
property. Any personal property received is also considered boot in
a real property exchange transaction. If the Exchanger receives
cash or other property in addition to like-kind property, this may
result in a taxable event. To determine the taxes that may be due,
several steps are required. First, the Exchanger's tax advisor must
calculate the realized capital gain. Second, the amount of "boot",
money or other property received, along with any depreciation recapture,
must be determined. Finally, a tax advisor will review the Exchanger's
specific situation to see if there are additional tax issues that
may offset any current capital gain tax liabilities.
Newsletter compliments of Asset