1. General comments

In order for the taxpayer to fully defer his gain on the sale of "relinquished property" the "replacement property" must have a fair market value equal to or greater than the relinquished property value and the taxpayer must use all of his equity to acquire the replacement property. To the extent the taxpayer receives money or other property, he will have "recognized gain." This is commonly called "boot."

2. Examples of "boot netting" rules

In the examples, "T" stands for "taxpayer" selling the relinquished property and replacing it with replacement property within the 180 day replacement period in I.R.C. Sec. 1031.

(a) Rule 1: Cash received on disposition of relinquished property is offset by cash paid on acquisition of replacement property.

Example 1: T transfers relinquished property with fair market value of $100,000.00 and acquires replacement property with a fair market value of $100,000.00. All cash is used to acquire the replacement property. There is no boot and T fully defers his gain.

(b) Rule 2: Debt relief on the disposition of relinquished property is offset by cash paid on the acquisition of replacement property.

Example 2: T transfers relinquished property with a fair market value of $100,000.00 and acquires replacement property with a fair market value of $100,000.00. T is relieved of a $30,000.00 liability on T’s relinquished property. T acquires replacement property with $70,000.00 cash and adds an additional $30,000.00. T does not assume a new liability on the acquisition of replacement property. T fully defers his gain. T does not receive boot.

(c) Rule 3: Debt relief on the disposition of relinquished property is offset by debt assumed on the acquisition of replacement property.

Example 3: T transfers relinquished property with a fair market value of $100,000.00 and acquires replacement property with a fair market value of $100,000.00. T is relieved of a $30,000.00 liability on his relinquished property. T acquires replacement property with $70,000.00 cash and assumes a $30,000.00 liability. T fully defers T’s gain. T does not receive boot.

(d) Rule 4: Cash received on the disposition of relinquished property is not offset by debt assumed on the acquisition of replacement property.

Example 4: T transfers relinquished property with a fair market value of $100,000.00 and acquires replacement property with a fair market value of $100,000.00. T is relieved of a $30,000.00 liability on T’s relinquished property. T assumes a $40,000.00 liability on the acquisition of replacement property. $60,000.00 cash is used for acquisition of replacement property, leaving T with $10,000.00 in cash from the relinquished property T did not use. T has recognized gain, or boot, in the amount of $10,000.00.