Total Gain of Sale

Total Boot

Gain to be reported

Gain which will be deferred

Adjusted Basis of Property bought


In General an Exchange (known as a 1031 Exchange) is the sale of your property and then putting all of the money received into the purchase of a new Like Kind Property. By doing this you avoid reporting all of ar at least a portion of the taxable gain of the sale on your current tax return. In essence you Defer the gain by transferring it to your new property. The mechanics of this deferal is done by adjusting the Basis of the new property by the amount of the deferred gain. This is accomplished by subtracting the sale's deferred gain from the cost of the new property. For example if the cost of the new property is $300,000 and the deferred gain is $50,000, the adjusted basis of the new property is now $250,000.
Like kind
The same type or category of property by IRS definitions. For example, Real Estate (improved or unimproved) for Real Estate, NOT Real Estate for a Truck.
If the properties in the exchange are not of equal value the difference must be made up (by either the buyer or seller) by giving something of value to make up the difference. Usually this is Cash, but it could be anything of value (ie a Truck). This is called Boot & if received by the seller is Taxable in the year of sale.

In addition to these amounts, Mortgage relief is considered boot.
Mortgage relief
When the mortgage given up (Old mortgage) is greater than the mortgage assumed (New mortgage), the difference has the same effect as receiving cash and is considered Boot.
Original Basis
The amount originally paid for the property, plus all expenses of the purchase.
Adjusted basis
The Original Basis PLUS any Improvements, LESS all Depreciation, and LESS any Deferred Gain from a previous Exchange.
Exchange expenses
The sum of costs paid by the seller for both the sale of the Old property and the purchase of the New property --- the commissions and other charges paid to handle the transaction. These are only the fees, & do not include the prorations for Property taxes or Insurance, etc.

These expenses reduce taxable Boot.
A paper writeoff allowed by the IRS for assumed wear and tear of the property. It is determined by IRS Tables for specific types of property. Depreciation reduces the basis of a property.
Total gain on sale
The difference between the sales price and the adjusted basis, reduced by the cost of selling the property.