owner carry mortgage, boot, 1031 exchange

Dear 1031x.com: As an incentive to buyers of my exchange properties I would like to offer to take back a 2nd. My properties all have very low basis and I understand my 2nd trust would be treated as boot.

 

Say the property was initially acquired by me for $120,000 coming from another property that I sold. The acquired property has a basis of only $20,000 due to many years of depreciation and exchanges. Say I sell it for $300,000 and the mortgage to be paid off is $100,000. I take back a 2nd in the amount of $10,000. I would replace the property with an exchange property of equal or greater total price and debt.

 

Is there a way to not end up paying $10,000 in taxes out of the $10,000 boot?

 

Maybe I can add $10,000 of my own to increase what I invest in the replacement property. Maybe I can take on a larger mortgage and more expensive replacement. I have no idea how to calculate the tax on the boot or what are my options, if any, to minimize the tax on the boot. Can you tell me my options? Even more of a challenge: can you explain it so I can understand it?

 

Thanks, C

 

Dear C:  I am going to use your numbers when replying to you.  Because the size of the owner carry is small ($10K)  I am going to suggest a specific strategy.  Instead of carrying back the mortgage, raise $10K of cash from another source.  Bring it to closing and lend it to your buyer.  Now the $10K will come back to you at closing and will be part of your 1031 exchange.  In this strategy you will not have any boot.  If you carried back a mortgage your tax basis in the carry back would be ZERO.  With my strategy your tax basis in the $10K mortgage is $10K.  With my strategy when you are paid back the $10K you pay no tax on the principal.  You only pay tax on the interest.  Call with any questions.

Steve Hickox
Attorney / President

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