A term referring to the U.S. Internal Revenue Code Section 1031, Mortgage Boot refers to additional financing that can create an imbalance in an exchange of like-kind properties. In a 1031 exchange, a taxpayer can defer capital gains taxes when exchanging one investment property for another like-kind property, assuming all the IRS guidelines are met.
Mortgage boot occurs when the mortgage on the replacement property is less than the mortgage on the relinquished property. The difference is treated as “boot,” which is taxable. Essentially, it is the cash or equity received by the seller in addition to the like-kind property.
For example, if the mortgage on the property you’re selling is $300,000 and the mortgage on the property you’re buying is $250,000, there would be $50,000 in mortgage boot. This amount would generally be considered taxable income.
Mortgage boot can also occur in the reverse situation, where the mortgage on the replacement property is greater than the mortgage on the relinquished property. The excess financing received could be treated as boot and be subject to taxation.
The term “boot” also encompasses other non-like-kind property or cash received in a 1031 exchange, all of which may be subject to capital gains tax. Careful planning and understanding of the complex rules and guidelines surrounding 1031 exchanges are crucial to avoid unexpected tax liabilities. It is typically advisable to consult with a tax professional or a qualified intermediary who specializes in 1031 exchanges such as 1031 Exchange Place to ensure that the transaction is structured correctly.