Boot and Gain Recognition Flashcards

A taxpayer's realized gain is zero (no economic gain), yet the taxpayer receives $30,000 in cash boot. How much gain is recognized?

Answer: $0, because recognized gain cannot exceed realized gain

Recognized gain is limited to the lesser of boot received or realized gain; since realized gain is $0, no gain is recognized even though boot was received.

Which of the following best describes the 'net boot' concept used in gain recognition calculations?

Answer: Boot received minus allowable exchange expenses and any boot paid by the taxpayer

Net boot is computed by reducing gross boot received by exchange expenses paid and any boot the taxpayer contributes, yielding the net amount subject to gain recognition.

A taxpayer sells a property with an adjusted basis of $100,000 for $400,000 (no debt) and acquires replacement property worth $350,000. Ignoring selling costs, what is the recognized gain?

Answer: $50,000

Realized gain is $300,000; the $50,000 shortfall in reinvestment equals the boot received; recognized gain is the lesser of $50,000 or $300,000, which is $50,000.

How does the recognition of gain on boot received affect the basis of the replacement property?

Answer: The basis is adjusted upward by the amount of gain recognized on the boot, reducing deferred gain

Gain recognized on boot reduces the amount of deferred gain, so the replacement property's basis is stepped up by the recognized gain, partially restoring basis.

A taxpayer sells unencumbered property for $600,000 (adjusted basis $200,000) and acquires replacement property worth $600,000 by assuming a $200,000 mortgage and using $400,000 in exchange funds. What is the recognized gain?

Answer: $0, because full value was reinvested with no cash back

All $600,000 in proceeds were fully reinvested (via $400,000 exchange funds plus $200,000 in assumed debt), no boot was received, and therefore no gain is recognized.

For purposes of gain recognition on a 1031 exchange reported on IRS Form 8824, which line captures the recognized gain that flows to Schedule D or Form 4797?

Answer: Line 20 — Gain recognized (lesser of line 15 or line 19)

Form 8824, Line 20 captures the recognized gain as the lesser of the boot received (line 15) or the realized gain (line 19), and this amount flows to Schedule D or Form 4797.

In a 1031 exchange in which no boot is received and the taxpayer fully reinvests all proceeds into qualifying replacement property, the result is:

Answer: Full deferral of all realized gain with no gain recognized in the current year

When no boot is received and all exchange proceeds are reinvested into qualifying like-kind replacement property, the entire realized gain is deferred and no gain is recognized in the current tax year.