What does boot mean on the CPA exam?
Last reviewed
Boot. Anything received in an otherwise tax-free exchange that is not the qualifying property, typically cash or debt relief. Gain is recognized up to the boot received.
Defined against Sec. 1031(b).
Worked example
Priya swaps a rental building, adjusted basis $380,000 and worth $600,000, for a different rental building valued at $540,000 and $60,000 of cash. Both are investment property, neither carries a mortgage, and the swap otherwise meets the like-kind rules for real estate.
What gain must Priya report now, and what basis carries into the replacement building?
| Amount realized: the new building plus the cash540,000 + 60,000 | 600,000 |
| Realized gain600,000 - 380,000 | 220,000 |
| Recognized gain: capped at the boot received, the $60,000 of cash, since that is less than the gain realized | 60,000 |
| Gain deferred into the new building220,000 - 60,000 | 160,000 |
| Basis in the new building: old basis, less cash received, plus gain recognized380,000 - 60,000 + 60,000 | 380,000 |
Answer: Priya recognizes $60,000 of gain and defers $160,000. Her new building takes a basis of $380,000, which is its $540,000 value less the $160,000 deferred gain.
The trap: Recognizing the whole $220,000 because cash changed hands, or none of it because the exchange is like-kind. Boot triggers gain only up to the boot itself, and a liability the other side takes over counts as boot just as cash does.
Based on IRC Sec. 1031(b); IRC Sec. 1031(d).
Which CPA exam sections use boot?
Boot appears in the TCP section of the CPA exam.
Related terms
- at-risk amount: How much a taxpayer could actually lose in an activity: cash and property contributed, plus debt they are personally liable for.
- like-kind exchange: A swap of real property held for business or investment, where gain is deferred rather than recognized.
- cash basis: Recognizing revenue when cash is received and expense when cash is paid.
- carryover basis: Basis that follows the property from the previous owner instead of resetting to what was paid.
- hot assets: A partnership's unrealized receivables and inventory.
- qualified nonrecourse financing: Borrowing secured by real property from a commercial lender, where nobody is personally liable.