I have a question regarding a 1031 exchange when there is a boot and I have been using the deprecation deduction.

[michael140]

Here is my example. I sell a house for 700,000 and I purchase a new one at 680,000 giving me a boot of 20,000.  I deducted about 200,000 in depreciation over 24 years.  

What might the depreciation recapture amount be on the boot (20,000).  I understand I need to pay this tax in addition to the capital gains taxes from the Feds and my state (Oregon).

Thank you!

[M-MTax]

Boot is listed as ordinary income on form 8824.

[Mike9241 · Accepted solution]

There may be more or less than the $20K boot you cite. When you sell the property there will be seller capital closing costs (those that affect the taxable gain) and 1031 exchange charges which will reduce that $700K. Also, if there is still a mortgage, unless the buyer assumes it, there will be even less cash since there's probably a due on sale clause. on the exchange when you purchase that $680K replacement property there will be capital expenses (such as title charges) that will add to the cost. However, a mortgage on the replacement property would affect the cash needed or received to close the exchange and thus affect boot which would affect the taxable gain.

Ideally, if you have never done a 1031 exchange before it would be best to sit down with a pro. all the rules for a valid 1031 exchange must be met. If you mess up on just one the exchange can become fully taxable. The alternative is to work through form 8824 to see how you come out 

https://www.irs.gov/forms-pubs/about-form-8824 

[demiace]

• If the boot amount is relatively small (a few thousand) and spent on necessary improvements paid out of pocket to fix the replacement property, does that reduce line 15?
• Would driveway repair of the replacement property, to make it safe and usable, qualify to reduce the boot amount that the QI sent?
• If the cost of the repairs was used before the check from the QI was received, does that qualify?
• Is a form 4797 still needed then since there is no taxable gain?

[DianeW777]

No, the gain is taxable and any capital improvements would be listed as an additional asset in the rental activity. This answers each of your questions. Form 4797 would still be needed since you had 'boot'.

The capital improvements would be listed as a separate asset after the like kind Section 1031 trade.

Boot: Any property or money you might have received that is unlike property in the exchange would be immediately subject to capital gains tax. 

@demiace