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Boots & Taxes In A 1031 Exchange
-- By Priya Jestin, Staff Writer
What happens when you cannot or do not reinvest all of the cash from the sale of a property into the purchase of your exchange property? You have to pay tax. The IRS has coined a very lovely term for this part of the 1031 exchange that is taxable: Boot.
Let me use an example to explain: Imagine you sold your property for $200,000 in December 2006. You pay off your mortgage and are left with around $100,000, which you pass on to the qualified intermediary. Now you buy another property in March 2007 for $180,000, take a mortgage loan of $100,000 and pay up $80,000 in cash. This means you are still left with $20,000 in unspent proceeds. Your qualified intermediary will return this money to soon after the purchase. And you are liable to pay taxes on the proceeds or in this case, the entire $20,000.
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