Boot Lawyers and Qualified Intermediaries

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What is a "Boot" Lawyer

"Boot" is an informal term used to discuss the tax implications of a 1031 Exchange (also known as a "like-kind" exchange). It refers to taxable money or other property that a taxpayer receives during an exchange. Generally, taxpayers should try to avoid receiving boot.

What are the most common sources of boot?

  1. Cash gained from an exchange. This is usually money gained when a taxpayer is "trading down," or exchanging a higher-value property for a lower-value property. This can be avoided by trading property in "like-kind."
  2. Funds left over from excess borrowing. If a taxpayer garners more funds than needed to purchase a replacement property, the money left over will become taxable boot. It is sometimes possible to avoid this kind of boot by returning excess funds to the qualified intermediary and putting them towards other replacement property.
  3. Money from sales that is used to pay for non-qualified expenses. "Non-qualified" expenses may include rent-related chares, maintenance fees, or other expenses that fall outside of regular closing expenses.
  4. Debt reduction boot. This kind of boot is generated when the debt on a replacement property is less than that of the property being exchanged. Because the difference in debt comes out in favor of the taxpayer, it is considered a taxable or capital gain.
  5. Non-like-kind property that is gained in addition to the replacement or like-kind property.

How can I avoid receiving boot?

The easiest way to avoid receipt of boot is to avoid trading down. Always make sure that your replacement property is valued at more than the property you wish to exchange, and make sure that the difference in debt will not end with you holding extra cash or value. You may also wish to bring cash to the closing of your replacement property in order to avoid spending exchange money on unqualified costs. Any measures that prevent you from ending up with excess funds will also protect you from receiving boot.

Do I need a lawyer to help me with my boot problem?

If you believe that you might end up with boot received from a 1031 Exchange, you should contact an attorney that specializes in real estate exchange to protect yourself from unnecessary income tax expenses. A real estate lawyer can also assist you in drafting solid documents for your property exchange so that you don?t end up trying to pay off non-qualified expenses.

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Last Modified: 11-13-2013 11:05 AM PST

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