[Anonymous]

I know this going to come up and I feel like RogerCPA didn’t go over it enough.

Can someone provide a quick summary of boot received transactions and how to handle it, and what the exceptions may be?

[ahgandar]

asitl, Boot In what Context?

For Like Kind Exchanges:

Think of Boot, with regard to Like Kind Exchanges, as something that you receive in addition to what you are already owed (or what you are already getting).

Example: If you and I were exchanged assets, lets say I gave you my BMW 335 for your BMW 328…My Bmw 335 has a FMV of $30,000 (Adjusted Basis of 25,000) and your BMW 328 has a FMV of $20,000…..In order to compensate me for that additional $10,000 discrepancy, you give me an additional $10,000 in cash. That cash that I receive is boot..Even if you give me cash of $10,000 and another item, lets say, a BMW Hat, they are both considered boot. Bc boot is anything received in excess of what Im already getting.

So in this example, I realize $30,000 (FMV of your BMW 328 of $20,000 and the Cash of $10,000). My basis would be as follows:

Adjusted Basis in my BMW 335 25,000

+ FMV of boot given 0

+ Gain Recognized* 5,000

– FMV of Boot received 10,000

– Loss recognized 0

Basis I have in your BMW 328 20,000

* Remember, that you always recognize gain by the lesser of BOOT RECEIVED or Gain REALIZED (in this case I realized a 5,000 gain (Realized amount of 30,000 of the items you gave me – my adjusted basis of 25,000) so my realized gain of 5,000 is smaller than the boot I received of 10,000. Also, remember that the reason that the gain increases your basis is bc you are being taxed on that, when you increase your basis, that means that in a future period you will recognize less gain (i.e if you sell somethin for 100 bucks w a basis of 50 bucks = 50 buck gain, but if you sell something for 100 bucks w a 60 dollar basis = 40 buck gain, you recognize a lower gain, which is a good thing)

W regards to like kind exchanges, boot can also be any assumption or relief of debt. So in this example that I gave, if you assumed my debt of $5,000 that I owed on the car, the calculation would be as follows:

Adjusted Basis in my BMW 335 25,000

+ FMV of boot given 0

+ Gain Recognized** 10,000

– FMV of Boot received 15,000

– Loss recognized 0

Basis I have in your BMW 328 20,000

** In this case, my recognized gain is $10,000 (not the $5,000 as in the other example). This is b/c my Realized gain is $35K (328 you gave me of $20K + cash $10K + $5K debt relief) minus adjusted basis of $25,000, which is $10,000. In this case, the realized gain is $10,000 and the boot (cash) you gave me is $10,000. So my recgonized gain is 10,000.

I hope this helps some..Please let me know if this doesnt make sense.

BEC 78 (11/28/2011); 71 (1/28/2010)
AUD 75 (11/05/2010); 73 (11/23/2009)
FAR 77 (08/08/2011; 70 (04/28/2011); 64 (02/28/2011)
REG 77,(11/12/2011); 77 (10/31/2009) Expired

Done after two years

[jdiiorio]

That's a great explanation. I just want to confirm I understand what happens when both parties exchange boot.

If both boots (given & received) are in cash you net them? But if one is cash and one is lets say cancellation of debt you can't net them right?

For example if in the case above you also gave $3000 cash in addition to your BMW 335?

ILLINOIS CANDIDATE
FAR - Passed
BEC - Passed
AUD - Passed

[Anonymous]

@ahgandar- I don't think we recognize loss on Like-Kind Exchanges and therefore, should not be included in the calculation of your basis. But I'm not 100% sure, so I may be mistaken. I'll have to check on that when I get home tonight.

[ahgandar]

Hey Jdiiorio, you are right…You can only net debt for debt, which makes sense right.

so if I also gave $3,000 of cash then the basis is as follows, assuming the same information on example 2:

Amount realized $25K + $5K of cash + $5k of debt relief – $3K of cash given = $32,000

Adjusted Basis 25,000

Realized Gain 7,000

Adjusted Basis 32,000

+ Gain Recognized 7,000 ( Boot received (5K of cash + 5K of debt relief = 10K) so ill take the 7K instead

+ FMV of boot given 3,000

– FMV of boot received (10,000)

New Basis 32,000

So remember, only debt for debt can be netted.

There are also some slight rules for corporations when calculating property distrubtions….if youd like to go over that..

In my opinion, if you understand the underlyings of our like kind exchange problem….the sims cannot fool you..

BEC 78 (11/28/2011); 71 (1/28/2010)
AUD 75 (11/05/2010); 73 (11/23/2009)
FAR 77 (08/08/2011; 70 (04/28/2011); 64 (02/28/2011)
REG 77,(11/12/2011); 77 (10/31/2009) Expired

Done after two years

[ahgandar]

Hey CPAMAN, yes, for like kind exchanges, a loss would reduce your basis because the taxpayer would have already received a tax benefit on that amount of loss recognized. Im about 99% sure that this is the case.

Please let me know if you find otherwise.

BEC 78 (11/28/2011); 71 (1/28/2010)
AUD 75 (11/05/2010); 73 (11/23/2009)
FAR 77 (08/08/2011; 70 (04/28/2011); 64 (02/28/2011)
REG 77,(11/12/2011); 77 (10/31/2009) Expired

Done after two years

[Anonymous]

Where would we get the loss?? I don't recall ever recognizing loss on a like-kind exchange.

If the exchange causes a realized loss, none of that would be recognized. That's what I think.

But don't listen to me. Seriously, I don't think I know what I'm talking about, lol. Oh boy! I am so going to fail REG again. Ugh!!

[jdiiorio]

Thanks! Glad I've been understanding it the right way so far haha What do you mean by slight rules for corporations when calculating property distributions? Are you referring to liquidation/non liquidating distribution of property instead of cash?

ILLINOIS CANDIDATE
FAR - Passed
BEC - Passed
AUD - Passed

[ahgandar]

I agree with you, it would seem that a loss would rarely ever happen, but from looking old textbooks, the loss would reduce the basis.

I guess a loss would probably occur when there is unrealized depreciation on an asset. This would make the basis be greater than the FMV. Once again, we probably wouldnt see that on the exam.

BEC 78 (11/28/2011); 71 (1/28/2010)
AUD 75 (11/05/2010); 73 (11/23/2009)
FAR 77 (08/08/2011; 70 (04/28/2011); 64 (02/28/2011)
REG 77,(11/12/2011); 77 (10/31/2009) Expired

Done after two years

[ahgandar]

jdiiorio

For corporations, the receiver of a distributed property always take the FMV of the property received as its BASIS. Furthermore, dividend income (to the receipient) is always the FMV of property received minus the liabilities assumed by the corp)

I wouldnt be surprised of the examiners try to give up a crazy Property distribution calculation and how that affects the shareholders basis, E&P etc.

E&P is always increased by gain recognized by the corp distributing property minus the FMV of property distributed (greater of FMV or basis) minus Liabilities assumed by distributee.

BEC 78 (11/28/2011); 71 (1/28/2010)
AUD 75 (11/05/2010); 73 (11/23/2009)
FAR 77 (08/08/2011; 70 (04/28/2011); 64 (02/28/2011)
REG 77,(11/12/2011); 77 (10/31/2009) Expired

Done after two years

[Yvonne570]

Boot paid: include in basis

Boot received: include in proceeds

1) Proceed – basis = gain/loss realized

****always look at boot paid (received only included in basis)

2) Gain/loss recognized: lower of boot received/ or gain realized (above) ***loss excluded like kind exchange!

3) New basis: adjusted basis of property given ((NBV) + boot given) + gain recognized – boot received

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[hopefulcpa28]

I have memorized these formulas and so far, it has helped me a LOT.

Quick review:

Like Kind exchange excludes: stock, inventory, securities, partnership interest, and real property in different countries.

Gain/loss realized: (FMV of the new property + Boot received) – (NBV of the property given up + Boot paid)

Gain/loss recognized: Loss is never recognized. Gain recognized: Lesser or gain realized or boot received

Basis: NBV of the property given up + gain recognized + boot paid – boot received.

I believe, you can only net debt…so mortgages. I don't think cash are netted. Also, if one party gives a property in addition and other gives cash, that can't be netted either.

[Yvonne570]

I like your summary hopefulcpa. The netting is something I missed and have to catch. If boot given and received are both liabilities, then net. The net difference is what we use as the either boot received or boot given. That's critical. Thanks.

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[Author]

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