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Baltimore
City -
Canton
Fells Point
Federal Hill
Baltimore
City N. -
Roland Park
Guilford
Homeland
Baltimore County -
Ruxton
Cockeysville
Lutherville
Hunt Valley
Greenspring Valley |
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Do a Reverse Exchange
A properly structured exchange is the transfer
of property for property, thus deferring capital
gain taxes. Any cash received, any reduction in
mortgage or any other non-like-kind property received
is considered "boot" and is taxable to
the extent of the capital gain. To fully defer
all capital gain taxes, an Exchanger must meet
two requirements:
Reinvest
all exchange proceeds
If an Exchanger does not reinvest all exchange
proceeds from the sale of the relinquished property,
the balance received is considered "cash boot",
and gain may be recognized on that amount.
Acquire property with
the same or greather debt
If an Exchanger does not acquire a replacement
property with an equal or greater amount of debt,
he or she is relieved of a debt obligation, which
is considered "mortgage boot". The IRS
considers this reduction in debt a benefit to
the Exchanger; therefore, it is taxable, unless
it is offset by adding equivalent cash to the
replacement property purchase.
How it works
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Example I |
Sale |
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Purchase |
Boot |
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Sale price |
$ 450,000 |
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Purchase price |
$ 600,000 |
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- Debt |
- $ 200,000 |
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New Debt |
$ 380,000 |
0 |
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- Cost
of Sale |
-
$ 30,000 |
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Exchange Proceeds |
= $ 220,000 |
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Down Payment |
$ 220,000 |
0 |
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Analysys
Since the Exchanger acquired $180,000
more debt and reinvested all the net ecquity,
the tax is fully tax deffered.
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Example II |
Sale |
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Purchase |
Boot |
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Sale price |
$ 450,000 |
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Purchase price |
$ 360,000 |
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- Debt |
- $ 200,000 |
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New Debt |
$ 160,000 |
$40,000 |
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- Cost of Sale |
- $ 30,000 |
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Exchange Proceeds |
= $ 220,000 |
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Down Payment |
$ 200,000 |
$20,000 |
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Total
Boot |
$60,000 |
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Analysys
Since the Exchanger only acquired $160,000
of debt, there is $40,000 of mortgage
boot. Additionaly, the Exchanger did not
reinvest $20,000 of the net equility,
which results in $20,000 of cash boot.
The combined amounts ($40,000+$20,000)
equate to $60,000 in boot, which is taxable.
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Information Provided
by
Asset Preservation,
Inc.
National Headquarters: 800-282-1031 or
info@apiexchange.com
This information is not intended
to replace qualified legal and/or tax advisors.
Every taxpayer should review their specific transaction
with their own legal and/or tax counsel.
© 2000 Asset Preservation, Inc. |
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