How to calculate 1031 Boot Taxes

[Karen Seale]

Hello everyone,

We have been searching the posts here on BP and still haven't really found a specific answer to our question.  How do you calculate tax on a  1031 Boot?  Here's our situation:   We sold one property and are buying 5.  We may need to drop one of the 5 and want to know what the tax consequences are.  We need specific numbers and a calculation we can use to decide whether we keep the property and pay the possible $35K in repair costs or use the purchase price/cost to invest in something else that was not listed on our 1031 (since we will be paying CG taxes anyway).  Basically, we need to know if the boot taxes would be less than the repair costs of the property.

Thanks in advance for your help!

Karen

[Nicholas Aiola]

@Dave Foster @Aaron Smith @Wayne Brooks @Karen Seale @Bill B.

Boot from a 1031 exchange is treated the same as if you sold the rental property outright. Therefore, suspended passive activity losses (PALs) do, indeed, offset boot from a 1031 exchange.

Who doesn't love tax-free cash?!

As Dave mentioned, suspended PALs don't directly offset capital gain from the sale of a rental property by way of netting the capital gain to zero; rather, they are reported separately but in an offsetting fashion. In other words, capital gain is reported in full (which will be included on Schedule D) and passive losses equal to that gain will be reported separately (which will be included on Schedule E), ultimately bringing the net effect to zero, if there are enough suspended and current PALs to do so. The net effect won't be zero if PALs < boot/capital gain.

This goes for both long- and short-term holding periods assuming, as Dave said, the intent on short-term holdings was to hold onto the property for productive use.

Finally, I side with Dave's accountant with respect to taxing boot as capital gain first, as opposed to depreciation recapture. You will get differences of opinion on this depending on which tax pro you speak to.

In my research and experience, I've yet to come across clear-cut guidance on this topic; if anyone has, please share and margaritas are on me.