6.3 Receipt of Cash and Other Property—“Boot”

If, in addition to like-kind (6.1) property, you receive cash or other property (unlike kind), gain is taxable up to the amount of the cash and the fair market value of any unlike property received. The additional cash or unlike property is called “boot.” If a loss was incurred on the exchange, the receipt of boot does not permit you to deduct the loss unless it is attributable to unlike-kind property you gave up in the exchange.

If you transfer mortgaged property, the amount of the mortgage is part of your boot. If both you and the other party transfer and receive mortgaged property, the party giving up the larger debt treats the excess as taxable boot. The party giving up the smaller debt does not have boot; see also 31.3. If you pay cash to the other party, add this to the mortgage you receive in figuring which party has given up the larger debt.

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image Caution
Deducting a Loss
You may deduct a loss incurred on an exchange if it is attributable to unlike property transferred in the exchange. The loss is recognized to the extent that the basis of the unlike property (other than cash) transferred exceeds its fair market value. However, a loss is not recognized if the unlike property is received together with the like-kind property in the exchange. Such a loss is not deductible.
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Form 8824.

The computation of boot, gain (or loss), and basis of the property received is made on Form 8824. Form 8824 must be filed for the year in which you transfer like-kind property. If the other party to the exchange is related to you, Form 8824 must also be filed for each of the two years following your transfer (6.6).

EXAMPLE
Jones owns an apartment house with a fair market value of $220,000, subject to an $80,000 mortgage. His adjusted basis is $100,000. Jones exchanges his building for Smith’s apartment building, which has a value of $250,000, subject to a $150,000 mortgage. Jones also receives $40,000 in cash. Smith’s adjusted basis for the building he trades is $175,000. Smith and Jones each pay $5,000 in exchange expenses.
The sample Forms 8824 for Jones and Smith show how they report the exchange. On Line 15, they show the boot received; their taxable gain is limited to this boot. For Jones, boot is the $40,000 in cash received. The $80,000 in liabilities transferred to Smith is not included because it does not exceed the $150,000 of liabilities Jones assumed.
For Smith, the Line 15 boot is $30,000:
Mortgage transferred $150,000
Less: Mortgage assumed   (80,000)
Less: Cash paid   (40,000)
Boot received by Smith   $30,000
On Line 18, Jones and Smith increase their basis for the buildings they traded by exchange expenses and the net amounts paid to the other party. For Jones, the Line 18 total of $175,000 includes:
Adjusted basis of building traded $100,000
Plus: Exchange expenses       5,000
Plus: Net mortgage assumed:
Mortgage assumed $150,000
Less: Mortgage transferred     80,000     70,000
    70,000 $175,000
For Smith, the Line 18 total of $180,000 includes:
Adjusted basis of building traded $175,000
Plus: Exchange expenses       5,000
Plus: Net amount paid:
Mortgage assumed   $80,000
Plus: Cash paid     40,000
Less: Mortgage transferred  (150,000)              0
   (30,000) $180,000
The liabilities Smith assumed and the cash he paid are not included on Line 18 because their total does not exceed the $150,000 of liabilities he transferred to Jones.
Line 25 shows the basis of the buildings Jones and Smith received in the exchange.

Sample Form 8824 for Jones (see the Example beginning on the preceding page)

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Sample Form 8824 for Smith (see the Example beginning on the preceding page)

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