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Invest on Sullivan's Island Requiements for Full Tax Deferral

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

Example I	Sale		Purchase	Boot
Sale price	$ 450,000	Purchase price	$ 600,000
- Debt	- $ 200,000	New Debt	$ 380,000	0
- $ 30,000
Exchange Proceeds	= $ 220,000	Down Payment	$ 220,000	0
Analysys Since the Exchanger acquired $180,000 more debt and reinvested all the net ecquity, the tax is fully tax deffered.

Example II	Sale		Purchase	Boot
Sale price	$ 450,000	Purchase price	$ 360,000
- Debt	- $ 200,000	New Debt	$ 160,000	$40,000
- Cost of Sale	- $ 30,000
Exchange Proceeds	= $ 220,000	Down Payment	$ 200,000	$20,000
Total Boot				$60,000
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.

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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Office Address:
2183 Hwy 17 North
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SC 29466

Email:
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