The term “boot” refers to the cash or non-like-kind property received in an exchange. Ideally, in a 1031 exchange, a taxpayer wants to avoid receiving any boot because it can trigger a taxable event.
The “netting” concept deals with how boot received and boot given are handled. When you dispose of a property in a 1031 exchange, you may receive some form of boot, such as cash or relief from debt. Conversely, when you acquire the replacement property, you may provide some boot, such as cash added to complete the purchase or taking on additional debt.
Boot Netting Rules refer to the methods of calculating and reconciling these amounts of boot in a 1031 exchange. They determine the taxable amount if a taxpayer ends up with net boot at the end of the exchange.
Here is a basic breakdown of how boot netting works:
- Compare the debt relieved on the relinquished property to the debt taken on the replacement property. If the debt relieved is more than the debt taken on, the difference is treated as boot received. If the debt taken on is more than the debt relieved, no boot is received.
- Calculate the difference between the cash or other non-like-kind property received and given. If you receive more than you give, the difference is treated as boot received.
- The sum of boot received in steps 1 and 2 is your total boot received. This amount is potentially taxable.
Keep in mind that this is a simplified explanation. There can be many complexities in an actual 1031 exchange scenario, and it’s always recommended to consult with a tax advisor or a 1031 exchange expert to navigate these issues.