Chapter § 55.5 TREATMENT OF BOOT

• Jurisdiction: Oregon

§ 55.5 TREATMENT OF BOOT

§ 55.5-1 Boot Defined

In a tax-free exchange, boot is property received that is neither qualified property nor like-kind property. See Starker v. United States, 602 F2d 1341, 1352 (9th Cir 1979). Examples of boot include the following:

• cash
• property such as stocks or partnership interests
• relief from indebtedness
• non-like-kind property, such as the receipt of personal property in an exchange involving real estate
• property that the exchanger does not intend to use in the exchanger's trade or business or to hold for investment.

§ 55.5-2 Taxation of Boot

Boot received in a tax-free exchange is taxable to the exchanger to the extent of the total gain realized in the transaction. Gain realized is the fair market value of the relinquished property minus its adjusted basis. To avoid receipt of boot in an exchange, the following rules generally apply:

(1) The replacement property must have a fair market value that is equal to or greater than the fair market value of the relinquished property; and

(2) The debt on the replacement property (or the debt on the replacement property plus the cash the exchanger invested into the exchange transaction) must be equal to or greater than the debt on the relinquished property.

EXAMPLE: The exchanger exchanges real estate relinquished property with a fair market value of $12,500 and a basis of $10,000 for real estate replacement property with a fair market value of $9,000, an automobile worth $2,000, and $1,500 cash. The gain realized in the transaction is $2,500 ($12,500 fair market value of the relinquished property minus its basis of $10,000). The boot received is $3,500, composed of the $1,500 in cash and an automobile valued at $2,000. The gain recognized is $2,500, which is the lesser of the boot received ($3,500) or the gain realized ($2,500). Treas Reg § 1.1031(d)-1(c).

§ 55.5-3 Offsetting Cash Boot Received with Cash Boot Given

Whether cash boot received can be offset by the payment of cash boot in an exchange is unclear. In Revenue Ruling 72-456, 1972-2 CB 468, the IRS held that cash boot received could be offset by brokerage commissions paid. In Barker v. Comm'r of Internal Revenue, 74 TC 555, 570-71 (1980), the court held that although an exchanger could not receive cash and thereafter invest in like-kind property on a tax-free basis, an exchanger could net the cash received in an exchange that was used, as required by the exchange agreement, to pay down debt against the exchanger's relinquished property. In Coleman v. C.I.R., 180 F2d 758, 760 (8th Cir 1950), the exchanger was required to recognize gain on cash received, because the exchanger was not under a binding obligation to use the cash to pay down the debt on the relinquished property. However, Example 2 of Treasury Regulation section 1.1031(k)-1(j)(3) provides that a taxpayer is not able to offset cash boot given for cash boot received and calls into question whether any cash boot received can ever be offset by cash paid.

§ 55.5-4 Offsetting Boot Received with Debt Increases

Boot the exchanger receives, except for relief-of-indebtedness boot, cannot be offset by assuming indebtedness on the replacement property or acquiring the replacement property subject to indebtedness. Treas Reg § 1.1031(d)-2. See Rev Rul 79-44, 1979-1 CB 265 (the exchanger was held to have taxable boot on the receipt of a promissory note in an exchange even though the replacement property was subject to debt equal to the amount of the note received). See Behrens v. C.I.R., 49 TCM (CCH) 1284 (1985), aff'd, 786 F2d 1170 (8th Cir 1986).

§ 55.5-5 Relief from Indebtedness

An exchanger is treated as having received boot if the other party to the exchange assumes liabilities on the relinquished property. Treas Reg § 1.1031(d)-2.

§ 55.5-5(a) Netting of Liabilities Exception

Although the relief of liabilities is generally treated as boot, it is not treated as boot to the extent that the...