1031 Requirements
A properly structured exchange is the transfer of property for property, thus deferring capital gain taxes. Any cash received, any reduction in mortgage or any other non-like-kind property received is considered "boot" and is taxable to the extent of the capital gain. To fully defer all capital gain taxes, an Exchanger must meet two requirements:
1. REINVEST ALL EXCHANGE PROCEEDS
If an Exchanger does not reinvest all exchange proceeds from the sale of the relinquished property,
the balance received is considered "cash boot," and gain may be recognized on that amount.
2. ACQUIRE PROPERTY WITH THE SAME OR GREATER DEBT
If an Exchanger does not acquire a replacement property with an equal or greater amount of debt, he or she is relieved of a debt obligation, which is considered "mortgage boot." The IRS considers this reduction in debt a benefit to the Exchanger; therefore, it is taxable, unless it is offset by adding equivalent cash to the replacement property purchase.
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