Like-Kind Exchange Boot: What Counts and How Does It Affect Basis?

First confirm qualification

Under current federal rules, Section 1031 generally applies to qualifying real property held for investment or productive use in a trade or business. Do not automatically apply it to ordinary personal property.

Step 1: realized gain

Realized gain measures the economic gain in the exchange by comparing the amount realized with the adjusted basis of property surrendered, including applicable cash and liability effects.

Step 2: boot

Boot generally refers to non-like-kind value received, such as cash, certain net debt relief, or other nonqualifying property. Boot can cause part of realized gain to be recognized currently.

Cash paid vs cash received

Cash paid to acquire replacement property is not the same as cash received. Direction matters. Do not label every cash amount as boot received.

Liabilities

Liability relief can act like value received, while liabilities assumed can offset relief under applicable rules. Keep the liability lines separate before netting.

Recognized and deferred gain

Recognized gain in a standard gain situation is generally limited by realized gain and applicable net boot received. Deferred gain equals realized gain minus recognized gain.

Replacement basis

One conceptual approach is replacement property's fair value minus deferred gain. Another starts with old adjusted basis and adjusts for boot, recognized gain, and liabilities. Use one consistent method to avoid double counting.

The takeaway

Realized gain first. Boot second. Recognized gain third. Deferred gain fourth. Basis last.

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