THE EXCHANGE EQUATION
The Exchanger can quickly calculate whether there will be recognized gain based on the following principals:
Taxable boot is defined as non like-kind property the Exchanger may receive as part of an exchange. Cash boot is the receipt of cash and mortgage boot (also referred to as debt relief) is a reduction in the Exchanger’s mortgage liabilities on a replacement property. Generally, capital gain income is recognized (and therefore taxable) to the extent there is boot.
For a fully deferred exchange, an Exchanger must reinvest all net equity and acquire property with the same or greater debt. Compare the relinquished property with the replacement property in terms of: Value, Net Equity (after deducting costs of sale) & Debt.
Example 1
The Exchanger is acquiring property of greater value, reinvesting the entire net equity and increasing the mortgage on the replacement property. Analysis: There is no boot and no recognized gain.
Example 2