Definition of "Boot"

Steve Pena real estate agent

Written by

Steve Penaelite badge icon

Pier Ridge Realty

Real estate, home and life insurance use numerous ambiguous terms you should know because you can significantly benefit from them. Let’s discover what the word boot usually applies to in real estate!

Why would you expose yourself to boot in real estate?

Real estate has always been a reliable investment, even during inflation. Besides house flipping, many dip their toes in a 1031 exchange to minimize their tax liability. However, real estate investors must be aware of the implicit risks they expose themselves to if they don’t consider the various aspects of the boot in real estate first! 

Suppose you want to benefit from the most competitive and professional representation when buying, selling, or investing in a property! In that case, we recommend you contact expert local real estate agents in your community! They will represent your best interests and protect you from losing money in a real estate transaction. So, what is boot real estate?

The word boot usually applies to what in real estate?

The boot real estate definition goes as follows! The discrepancy between the property’s fair market value transferred in a transaction and the actual worth of the property or properties obtained is called the “boot” in real estate. 

In layperson’s terms, the boot is the additional amount of money or property that one party must pay or get in addition to the property previously traded. For example, suppose a real estate investor is swapping a $300,000 property for a $400,000 asset. If the investor additionally receives $100,000 in cash as part of the deal, the $100,000 is referred to as the boot.

The boot in real estate typically occurs in a 1031 exchange. 

Regularly, the boot materializes in a 1031 exchange free of federal income tax. An investor can postpone capital gains payment after the property sale by reinvesting the profit in a similar asset. However, in a 1031 exchange, the investor must trade off the property for another like-kind real estate of the same or higher value.

Suppose the properties being exchanged are not of equal value. In that case, the party receiving the higher-valued item must pay the difference in cash or property to the other party. This distinction is known as the boot. 

A boot in real estate is taxable.

We must mention that the boot is taxed. If a party receives money as part of the boot, such money is considered taxable income. If the party getting the boot decides to accept property instead, they will not be taxed on the asset value they receive. Instead, they will be taxed on any future gain in value if they sell the property.

Investors must consider various factors when dealing with the boot!

Firstly, real estate investors must evaluate the boot’s worth and how it can influence their tax liability. If the boot is substantial, it may be more beneficial for the investor to pay capital gains tax on the property’s sale rather than get the boot.

Secondly, suppose the investor receives a house or apartment as part of the boot. In that case, they must examine the type of property first. The new investment might backfire on them if the property proves to be a difficult sell or money-pit in terms of its maintenance. 

Thirdly, real estate investors must double-check the transaction’s expenses, including any fees involved with the exchange and any taxes owed on the sale.

Fourthly, timing is also vital regarding the exchange. Suppose the property exchange takes place over more than one fiscal year. Then, boot taxation can also differ. 

Final thoughts

A 1031 exchange and boot in real estate terms can bring a tempting profit for investors as they can reduce their tax liability. Nonetheless, before getting into a 1031 exchange and trying to obtain a “boot real estate,” we recommend you counsel with an expert financial advisor and tax professional! 

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