What Tax Is Deferred?

What Tax Is Deferred? Long Term Capital Gains Tax 15% (Short Term tax is your income tax bracket) Depreciation Recapture Tax 25%. In addition, each state has their own state tax as well. Visit this link to find the tax for your state. http://www.taxadmin.org/fta/rate/ind_inc.html Three IRS Guidelines There are 3 Basic Guidelines set by the IRS for total tax-deferred treatment:

1.	The Replacement property purchase price should be equal to or greater than the Relinquished property sales price.

2.	The Replacement property debt (mortgage) should be equal to or greater than the Relinquished property debt (no “Debt Relief”).

3.	All net proceeds should be used to acquire the Replacement property.

If you do not meet all of the above guidelines, you may still do an exchange, but you may be subject to tax on the difference (boot). We recommend you seek tax advice when attempting a "Partial Exchange" and receiving Boot.


Sale price of Old Property $100,000 Mortgage Debt paid at closing $40,000 Cash to Intermediary $60,000

Example #1: The Exchanger sells their Old Property for $100,000. The mortgage on the property is paid off at closing and the balance of $60,000 is transferred to the intermediary. If they buy their New Property for $90,000, they' bought down by $10,000. The buy down does not kill their exchange, but the difference between the Old sales price and the new purchase price of $10,000 is taxable. The IRS calls this taxable amount boot. Example #2: Same facts as above, but instead of buying the New Property for $90,000, The Exchanger decides to buy a New Property for $150,000 for which they obtain a loan for $100,000. This means that they will only use $50,000 of the $60,000 proceeds that the intermediary is holding. The $10,000 excess is also boot and is taxable. In both of the examples above, the entire $10,000 is taxable. In a 1031 exchange, the gain is taxed first. Where you have a boot situation, the boot is taxable to the extent of the lesser of the boot or the entire gain on the transaction.

Boot “Boot” is property that is received in an exchange and that is not “Like-Kind”. Boot is defined as the “fair market value” of the non-qualified property received in an exchange. While the receipt of boot will not disqualify the exchange, an Exchanger who receives boot in an exchange transaction generally recognizes gain to the extent of the value of the boot received. Some common examples of Boot are:

•	Cash proceeds an Exchanger receives from the sale transaction or from the Qualified Intermediary after the exchange;

•	Nonqualified property, such as stocks, bonds, notes or partnership interests;

•	Proceeds taken from the exchange in the form of a note or contract for sale of the property. An Exchanger can utilize IRC §453 to recognize the gain (boot) of a seller carry-back note received in an exchange transaction under the installment sale rules;

•	Relief from debt on the Relinquished Property caused by the assumption of a mortgage, trust deed, contract, or an agreement to pay other debt that is not replaced on the Replacement Property;

•	Personal Property received in the exchange. Personal Property is never “Like-Kind” to real property; and

•	Property that is intended for personal use and not for use by the Exchanger as either his/her investment or business use property.