19) WHAT IS BOOT?
Boot is defined as any "NON LIKE KIND" property received by the Exchanger in the exchange and it is taxable.
CASH BOOT: Cash Boot consists of any funds received by the Exchanger, either actually or constructively. If an Exchanger does not spend all of the proceeds from the sale of the relinquished property, he/she will have actual receipt of the balance not spent and pay taxes on that amount. IMPORTANT: If the Exchanger wants cash out of the PHASE I exchange, the Intermediary must be notified immediately. The cash must come directly out of the closing of Phase I and not from the Intermediary. Once the exchange equity is in the "Qualified Escrow Account" at the Intermediary’s, the Exchanger cannot access the funds until the end of the exchange. (Constructive receipt of funds may occur in a case where the Exchanger carries back a note from his/her Buyer of the relinquished property, then sells that note at a discount. The Exchanger never actually receives funds for the discounted amount, however, he/she has constructively received that discount and pays tax on that amount.)
MORTGAGE BOOT OR DEBT RELIEF: Mortgage Boot occurs when the Exchanger does not acquire debt that is equal to or greater than the debt that was paid off, therefore, they were "RELIEVED" of debt. If the Exchanger does not acquire equal or greater debt on the replacement property, they are considered to be "RELIEVED OF DEBT", which is perceived as taking a monetary benefit out of the exchange. Therefore, the debt relief portion is taxable, unless offset by adding equivalent cash to the transaction.
An Exchanger must buy of equal or greater value while spending the NET (after costs) equity. It is absolutely acceptable to take cash out of the exchange and pay taxes on that amount only.
