Posted by William L. Exeter on August 01, 2003 at 13:12:47:
The specific answer just to the $20,000 question is yes, it is cash boot. You are trading even (selling $450K and buying $450K), but pulling cash out. However, when you factor in the closing costs you can often offset cash boot received with cash boot paid and not have a taxable event. You may want to have another tax advisor crunch the numbers if you are uncomfortable with the results.
Bill Exeter
Diversified Exchange Corporation
Is This “Cash Boot”? - Posted by BoJack
Posted by BoJack on July 31, 2003 at 20:30:15:
Scenario: Sell 1 rental house in California for $450,000. Pay off $50,000 mortgage and have $400,000 deposited with Qualified Intermediary (QI). Purchase 3 rental houses in Tennessee for $150,000 each. Pay for houses # 1 and # 2 with cash provided by the QI. Pay for house # 3 as follows: Take out a mortgage loan for $70,000. At the closing of house # 3, have QI provide $100,000 cash, and have mortgage provide $50,000 to seller of house and $20,000 is dispersed directly to me.
WILL THE $20,000 BE CLASSIFIED AS CASH BOOT? (My accountant says “no” – but I am not 100% confident she is right.)
If this is Cash Boot, is there any way around it. I need the $50,000 to complete the closure and some extra cash for repairs after purchase. But I would like to avoid 2 separate loan initiation & processing fees.
NOTE: In this example I have omitted commissions, fees, etc, to make the example simple. The basic question would be the same if they were included – will any excess mortgage money that comes to me be “cash boot”?
Conflicting Opinions??? - Posted by Bojack
Posted by Bojack on August 05, 2003 at 03:56:03:
Well…now I have differing opinions to what I thought would be a straighforward situation. JHyre does understand the situation correctly – the fair market value (FMV) is the same and the NET loan is the same, but the gross loan is $20,000 more than the current loan. So, I want to ask in the context of the conficting opinions, whose opinion should I believe? (I do not use this site enough to know who has greater credibility.) The purchase has not been completed – so, there is still time for me to take corrective action with regard to the loan amount, if need be. The suggestion for written opinions is a good one…thanks. Thanks very much for the responses so far.
Re: Is This “Cash Boot”? - Posted by Earl
Posted by Earl on August 02, 2003 at 07:02:28:
I am not an attorney but have done several 1031s’ before. It wasn’t clear from your post whether you have already bought the new properties or not. I had a similar situation selling a California condo although it was much smaller amount of $ coming back to me - about 7K.
But I had an alert QI and title officer working for me. When they realized funds might come back to me, they worked together to reimburse it to me in the form of some of my normal closing expenses so there would be no question that it was not cash boot. I also showed my tax preparer the settlements statements who agreed it was legit.
If it isn’t too late, and if you trust your QI, can you work this with them? They may be able to work it so there’s no question.
Also I had my accountant and QI put in a short memo their written justification for not calling it cash boot - and they both readily agreed - just made me feel better, so I could show anybody in the future that I was acting in good faith on the advice I received.
Re: Is This “Cash Boot”? - Posted by JHyre in Ohio
Posted by JHyre in Ohio on August 01, 2003 at 20:20:10:
William,
The FMV is the same, and the net loan is the same (i.e. - $50,000 = $70,000 less $20,000 refi, not normally a taxable event). While there might be some timing issues in re actually pulling the $ out, I would think that the $20,000 constitutes refi proceeds, as opposed to boot. Comments?
John Hyre