CES Boot and Gain Recognition 1 — Questions and Answers
Question 1: In a 1031 exchange, the term 'boot' refers to:
- Additional like-kind real property received beyond the relinquished property
- Non-like-kind property, cash, or net debt relief received in the exchange (Correct answer)
- The qualified intermediary's fee for facilitating the exchange
- Excess equity carried forward into the replacement property
Correct answer: Non-like-kind property, cash, or net debt relief received in the exchange
Boot is any non-like-kind property, cash, or net debt relief received by the taxpayer, and its receipt triggers gain recognition.
Question 2: A taxpayer relinquishes a property with a $500,000 mortgage and acquires replacement property encumbered by only a $400,000 mortgage. The $100,000 difference is best described as:
- Cash boot received by the taxpayer
- Mortgage boot (net debt relief) treated as boot (Correct answer)
- A non-taxable reduction in exchange value
- An exchange expense that offsets realized gain
Correct answer: Mortgage boot (net debt relief) treated as boot
When the taxpayer is relieved of more debt than assumed on replacement property, the net debt relief ($100,000) is treated as mortgage boot subject to gain recognition.
Question 3: The amount of gain recognized in a partially tax-deferred 1031 exchange equals:
- The total realized gain on the relinquished property
- The lesser of the boot received or the total realized gain (Correct answer)
- The greater of the boot received or the total realized gain
- Zero, because all gain is always deferred
Correct answer: The lesser of the boot received or the total realized gain
Recognized gain is capped at the lesser of the boot received or total realized gain, ensuring a taxpayer cannot recognize more than was actually gained.
Question 4: Which of the following is the clearest example of 'cash boot' in a 1031 exchange?
- Assuming a larger mortgage on the replacement property
- Receiving non-like-kind personal property at closing
- Receiving cash proceeds that are disbursed to the taxpayer rather than reinvested (Correct answer)
- Paying qualified intermediary fees from exchange proceeds
Correct answer: Receiving cash proceeds that are disbursed to the taxpayer rather than reinvested
Cash boot occurs when actual cash is returned to or received by the taxpayer instead of being reinvested through the qualified intermediary into replacement property.
Question 5: Which of the following costs are treated as exchange expenses that reduce boot and taxable gain?
- Mortgage principal payments made before closing
- Selling commissions and transactional closing costs paid at settlement (Correct answer)
- Depreciation previously taken on the relinquished property
- Tenant security deposits held in escrow
Correct answer: Selling commissions and transactional closing costs paid at settlement
Selling commissions, title insurance, escrow fees, and other closing costs directly associated with the exchange reduce the amount realized and offset boot.
Question 6: A taxpayer has a realized gain of $200,000 and receives $75,000 in boot. How much gain must the taxpayer recognize?
- $200,000
- $125,000
- $75,000 (Correct answer)
- $0
Correct answer: $75,000
Recognized gain equals the lesser of boot received ($75,000) or realized gain ($200,000), so only $75,000 is recognized and $125,000 remains deferred.
Question 7: If a taxpayer receives furniture and appliances (personal property) as part of an otherwise qualifying real estate exchange, how is that personal property treated?
- As qualifying like-kind property with no tax consequence
- As boot subject to gain recognition equal to its fair market value (Correct answer)
- As a tax-free gift excluded from the exchange calculation
- As a suspended item deferred until the replacement property is sold
Correct answer: As boot subject to gain recognition equal to its fair market value
Non-like-kind personal property received constitutes boot, and its fair market value is included in boot subject to gain recognition under IRC §1031.
CES Boot and Gain Recognition 1
In a 1031 exchange, the term 'boot' refers to: