Question

What is boot? What are the tax effects of giving and receiving boot in a like-kind exchange?

Answer 1

Answer

'Boot' is cash or other property added to an exchange to make the value of the traded goods equal. Cash boot is allowed to be part of a nonmonetary exchange under U.S. Generally Accepted Accounting Principles. However, for the exchange to qualify as nonmonetary, the value of the boot should be 25% or less of the total fair value of the exchange.

The tax effects of giving and receiving boot in a like - kind exchange is as folows

The base amount of the exchange remains tax-deferred, but the boot is considered a taxable gain. Even with the boot, however, the recipient will pay less in capital gains taxes for the current tax year than if he had sold the appreciated property and then purchased a different property. Parties will often engage in like-kind transactions in order to avoid or minimize the tax consequences of selling an appreciated asset