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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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A partnership is doing a 1031 exchange. a partner who owns

Customer Question

a partnership is doing a 1031 exchange. a partner who owns 56% of the partnership financed the original purchase with a bona fide mortgage. if that mortgage is paid off now but replaced by a new mortgage of the same amount from a 3rd party lender when the exchange is completed, will that avoid mortgage boot on the exchange?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Hi. I'm PDtax, and can assist.

Customer: replied 1 year ago.
the answer is.....?
Expert:  PDtax replied 1 year ago.

Since you did not have any debt on the property given up, the mortgage assumed on the property received is not boot.

Expert:  PDtax replied 1 year ago.

example: your property worth $100,000 and no debt is exchanged for a $160,000 property subject to a $60,000 mortgage. No boot.

Expert:  PDtax replied 1 year ago.

In reading your question again, you didn't say which property had the mortgage on it at exchange. If you refinanced the property exchanged before the exchange, then you have boot.

Expert:  PDtax replied 1 year ago.

Example #2: your property worth $100,000 has a $40,000 mortgage when exchanged for $160,000 property subject to a $60,000 mortgage. There is $40,000 boot.

Expert:  PDtax replied 1 year ago.

I have to revise example #2. You did not have mortgages on both parcels. Please clarify your fact pattern.

Customer: replied 1 year ago.
My issue is paying off mortgage on current property owed to a partner on exchange out. If we have equal debt to 3rd party on exchange in is there mortgage boot?
Expert:  PDtax replied 1 year ago.

I don't understand. From your questions:

" if that mortgage is paid off now but replaced by a new mortgage of the same amount from a 3rd party lender when the exchange is completed, will that avoid mortgage boot on the exchange?" sounds like your property was debt free when exchanged.

Expert:  PDtax replied 1 year ago.

your follow up:

"My issue is paying off mortgage on current property owed to a partner on exchange out. If we have equal debt to 3rd party on exchange in is there mortgage boot?" sounds like there was debt on the property you gave up.

Customer: replied 1 year ago.
owed to a partner. Paid off at 1st settlement. Then same debt amount incurred at 2nd settlement
Expert:  PDtax replied 1 year ago.

the formula for boot:

The formula for determining boot received is as follows:

Mortgage on your property surrendered
- Mortgage on the property received
- Additional cash paid by you towards the new property *
= Net boot received (not less than zero)
+ Any cash received by you in the exchange
= Boot received

Expert:  PDtax replied 1 year ago.

Did you provide interim financing to pay off the original mortgage, or did you use the proceeds from the new loan to satisfy the old debt?

Customer: replied 1 year ago.
Ok. Thank you!!
Expert:  PDtax replied 1 year ago.

Let's say there was $30,000 outstanding on the property exchanged, and $30,000 in debt on the new property received. In this case, there would be no boot.

Expert:  PDtax replied 1 year ago.

Since you received no net cash at settlement, there is no boot. Positive feedback is appreciated. I'm PDtax.

Expert:  PDtax replied 1 year ago.

Hi again. PDtax here. Can I ask for positive feedback to close out your question?

Expert:  PDtax replied 1 year ago.

Hi again. PDtax here. There may be more to your question. Can you tell me when you bought out the partner?

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