a. What is "boot" and how is it treated in like-kind exchanges? b. How are like-kind exchanges treated under the federal income tax laws? c. What requirements must be met for property to qualify for like-kind exchange treatment? Your Answer:a- Cash or other property used in an exchange to make the values of property traded equal. For instance, if you trade in a delivery truck on a new model, the cash you pay in addition to your old truck is boot. The most common sources of Boot include the following: Cash boot taken from the exchange. This will usually be in the form of "Net cash received", or the difference between cash received from the sale of the relinquished property and cash paid to acquire the replacement property. Net cash received can result when a taxpayer is "Trading down" in the exchange ( the sale price of replacement property is less than that of the relinquished.) The "boot" in exchange is anything of value exchanged which is not like-kind to the relinquished property. he boot is mostly in form of either cash or mortgage debt. b- No gain or loss is recognized when like-kind property is exchanged. When property that is not like-kind( cash or other property, know as boot) is received, then any realized gain is recognized to the extent of the boot received, but not to exceed realized gain. If there is a realized loss in a boot received situation, such loss is not recognized. If boot is given, generally no gain or loss is recognized. If, however, the boot given is property that has a difference between its basis and fair market value, then gain or loss will be recognized on the boot given. It is as if the boot property was sold separately from the like-kind property. Although this rule for recognition , in a boot given situation is a special case, it can produce strange result. The taxpayer can have a recognized gain greater than realized gain or a realized gain and a recognized loss. If a liability is assumed by the transferee, such assumption is treated like boot received by the taxpayer-transferor. Accordingly, the transferor will recognize gain under the same rule as in a boot received situation outlined above. It is treated as if the transferor received cash and then paid off the liability. c- For federal income tax purposes, business or investment property exchanged solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange other (not like-kind) property or money is received, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Exchanges involving like kind property held for investment or business purposes can qualify for nonrecognition of gain or loss. The reason for nonrecognition of gain or loss. The reason for nonrecognition is that the taxpayer is considered to be in the same economic position after the exchange has occurred and so is, in effect, continuing the old investment. Also, unless the
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- Spring '11
- Accounting, Taxation in the United States, fair market value