CES Like-Kind Property Requirements 2 — Questions and Answers
Question 1: What term is used to describe property given up by the taxpayer in a 1031 exchange?
- Replacement property
- Boot property
- Relinquished property (Correct answer)
- Exchange property
Correct answer: Relinquished property
The property given up by the taxpayer is called the relinquished property.
Question 2: In a 1031 exchange, what does 'boot' refer to?
- Any unlike property or cash received in the exchange (Correct answer)
- The down payment on the replacement property
- The qualified intermediary's fee
- The fair market value of the relinquished property
Correct answer: Any unlike property or cash received in the exchange
Boot is any unlike property or cash received in the exchange, which is taxable to the extent of gain.
Question 3: A taxpayer exchanges a property worth $500,000 for a replacement property worth $450,000 and receives $50,000 in cash. How is the $50,000 treated?
- It is tax-free as part of the exchange
- It is treated as boot and is taxable (Correct answer)
- It is deferred to the next exchange
- It reduces the basis of the replacement property only
Correct answer: It is treated as boot and is taxable
The $50,000 in cash received is boot and is taxable to the extent of the taxpayer's realized gain.
Question 4: Which of the following would create 'mortgage boot' in a 1031 exchange?
- Acquiring a replacement property with a higher mortgage than the relinquished property
- Acquiring a replacement property with a lower mortgage than the relinquished property (Correct answer)
- Paying off the mortgage before the exchange
- Using all-cash to acquire the replacement property
Correct answer: Acquiring a replacement property with a lower mortgage than the relinquished property
If the taxpayer takes on less debt on the replacement property than existed on the relinquished property, the net debt relief is treated as mortgage boot.
Question 5: To fully defer capital gains tax in a 1031 exchange, the replacement property must have a value that is:
- Equal to or less than the relinquished property
- Equal to or greater than the relinquished property (Correct answer)
- Within 20% of the relinquished property value
- At least double the relinquished property value
Correct answer: Equal to or greater than the relinquished property
To fully defer gain, the taxpayer must acquire replacement property of equal or greater value and reinvest all net exchange proceeds.
Question 6: Which of the following is considered 'exchange expenses' that reduce boot in a 1031 exchange?
- Loan origination fees
- Qualified intermediary fees (Correct answer)
- Hazard insurance premiums
- Property management fees
Correct answer: Qualified intermediary fees
Qualified intermediary fees are exchange expenses that can reduce the amount of taxable boot received.
CES Like-Kind Property Requirements 2
What term is used to describe property given up by the taxpayer in a 1031 exchange?