Finance
A Washington investor completes a 1031 exchange and purchases a larger replacement property using exchange funds plus additional debt. The additional debt the investor takes on in the exchange is called:
ABoot — taxable exchange proceeds
BMortgage boot — which is non-taxable and increases the basis of the replacement property✓ Correct
CDebt relief — which is taxable boot to the exchanger
DExchange equity — not subject to any tax consequences
Explanation
In a 1031 exchange, additional debt (mortgage) taken on by the exchanger when purchasing the replacement property is called mortgage boot. Adding debt is non-taxable — only receiving net cash (equity boot) or having debt relief (net debt reduction) triggers taxable boot.
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Key Terms to Know
1031 Exchange
A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.
Short SaleA sale of real property where the sale proceeds are less than the outstanding mortgage balance, requiring lender approval.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Math Concepts
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