Boot Confusion: When Debt in 1031 Exchanges Becomes a Hidden Tax Trap
A 1031 Exchange California can be a great way to defer taxes when selling an investment property. You swap one property for another of equal or greater value. On paper, it sounds simple. In reality, debt rules can create a hidden tax problem. That problem is called “boot.” What is Boot? Boot is anything you receive in a 1031 exchange that is not like-kind property. Many thinks of boot as cash, but debt relief can also count. If you owe less on your new property than you did on your old one, the IRS may treat that difference as taxable. How Debt Creates Boot Imagine you sell a rental for $500,000 with a $200,000 mortgage. You buy a new property for the same price but only take on a $150,000 mortgage. That $50,000 difference can be seen as boot. Even if you do not receive that money in cash, it might still create a taxable event. Why This Catches People Off Guard You might focus only on matching property values, thinking you are safe. But the IRS looks at both property and de...