Tips on Tax Deferred Exchanges
The term tax-deferred tax exchange is common term when an exchanger wants to sell property that has a huge taxable gain. In essence a boot is a term used by the IRS and tax professionals to define taxable funds in an exchange, and the person needs to remember that when they pull out money from an exchange the amount becomes taxable, but it does not ruin or disqualify the exchange.
A competent intermediary can only release funds at a particular time as clearly defined by the IRS and the most common time would be to as the person is closing the sale then the escrow closer can get instructions to release certain funds during the initial closing process and once the funds have been released out on the exchange the funds cannot be returned. Another time that funds can be released after the 45th day if there are no properties that have been identified and when no replacement property has been identified this means that the exchange has failed and all the money can be released on the 46th day or later. The money may be released after the 45th day, and they have closed on all the identified properties then the remaining funds can be released. It is common among many companies to instruct the escrow holder that the closer it is to the last transaction then they can release all the remaining funds to the exchanger while funding the last purchase and the last chance to release funds is after 180 days after the exchange has expired.
Boot is also created if there is a debt paid off in the sale and not replaced in the purchase that means that the mortgage is paid off in the deal and there is no debt or any cash added in the buy to replace it. The IRS views debt relief in the same regard as an exchange, and the other common situation that may lead to boot in exchange is when escrow includes a proration of rents and deposits on the settlement statement. Such statements relate to the business operating on the property and not in the actual purchase or sale of the property.
1031 exchanges are not a good fit for do-it-yourself investors because the way the law is structured depends on the situation of the taxpayer and the kind of property being relinquished and the qualities of the replacement property and other aspects of the property exchange may be involved. At times the completion of the sale may be a complex task and experts should be consulted every step of the way and thus this is not the job of a do-it-yourself kind of investor.