1031 Boot

On Friday, April 4, 2014 2:36:56 PM UTC-7, Stuart A. Bronstein wrote: | Person sells property for $2.8 million, nets $2.5 million after | mortgages are paid off.

| She then buys another property for $4.5 million, assuming a loan for | $2.5 million. So in the end she ends up with $500,000 cash if she | doesn't use it to pay down the loan.

| Is that considered boot in this situation? If so, is there a way to | avoid that other than paying down the loan (there's a large pre- | payment penalty)?

I'm not sure about your boot question.

But for other strategies, perhaps she could use the $500,000 to improve the new property? Would that need to be done before or as part of the sale to qualify under 1031?

Perhaps another property could be purchased for the $500,000 resulting in two replacement properties.

I believe the answers are yes, and no, respectively.

Thanks, Mark. I read through the statute and regulations, and it wasn't completely clear. (At least when I think as an advocate for the opposite situation.)

Yes, it is boot. One way to avoid it is to acquire a second replacement property to soak up the extra $500,000.

I also hope the buyer negotiated the purchase price down a bit due to the existence of a loan with a large prepayment penalty. Is that because its interest rate is above current market? That is a liability above and beyond the mortgage balance.

I'll ignore other costs (like the realtor commission)

The $500K is boot. From numbers you gave, the new house(s) must have $2.5M plus a $300K loan. No cash can come out for free in a 1031 exchange. I'd suggest that soon after a legit closing, one can refinance to pull money out. Even then, I don't know for sure if that doesn't skirt the issue.