An Arizona investor wants to exchange a property worth $550,000 (original cost basis $200,000) in a 1031 exchange. The replacement property costs $620,000. How much additional cash ('boot') must the investor contribute?

Explanation

In a 1031 exchange, to defer all capital gains taxes, the investor must reinvest all net equity in a property of equal or greater value. Since the replacement property costs $620,000 and the relinquished property is worth $550,000, the investor needs $70,000 additional cash (boot paid out = $620,000 − $550,000). Paying boot does not trigger tax; receiving boot does.