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In the USA I'm working on a 1031 exchange. I'm having trouble finding information on how a boot (if I take one) will be taxed.

I'm closing on my sale for $700k. I will have a capital gain of $550k. I have a mortgage of $200k.

If I buy something new for $600k, leaving me with a $100k boot, how will that $100k be taxed? I know it will be taxed but how much?

Will the entire $100k be a gain? Will that change the capital basis of this new property for future 1031 exchanges?

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  • If the sale is $700k and the mortgage outstanding is $200k, how did you arrive at a capital gain of $550k? What did I miss here? Wouldn't the gain be the difference between sale price and outstanding mortgage?
    – RiverNet
    Apr 20, 2021 at 19:57
  • I had a mortgage on the property. When I converted it from my residence to an investment the property was under water, so the capital basis for the investment was $150k. Depreciation has changed this a little but I wanted to keep round numbers for clarity
    – Matthew
    Apr 24, 2021 at 22:45

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Assuming there was a $200k mortgage on the relinquished property, then there is no 'mortgage boot', because there is a $200k mortgage on the replacement property.

You have the $100k 'equity boot' as you explained. It is fully taxable at your personal capital gains rate. Federal tax rate calculator here. Add your state income tax rate to this federal rate to find your total capital gains tax rate.

You can avoid an equity boot altogether, e.g. if you buy two replacement properties rather than one.

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  • If the $100k is all gain, does that change my capital basis in the new property?
    – Matthew
    Apr 22, 2021 at 5:18
  • Yes, according to this link that uses an example with a $113k gain: "You will have to adjust your basis in the new property down by the amount of the deferred capital gain. Your basis in the new property will now be $200,000 – $113,000, or $87,000." tax-lawyer-texas.com/2018/05/28/…
    – Orange Coast- reinstate Monica
    Apr 26, 2021 at 16:16

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