I’m not here to argue with you or anyone else. The fact is, however, that debt paid off through the sale of a relinquished property using an intermediary and not replaced with equal or greater debt OR an infusion of cash DOES constitute debt relief within Section 1031 of the code. You are making a point that happens infrequently at most in the real world. Most people I work with do not have a pile of cash that they want to use to replace the debt on their relinquished property. Instead, they must take on new financing in their replacement property. If they don’t contribute cash equal to or greater than their relinquished property debt or take on debt equal to or greater than the debt in their relinquished property, they’re going to have a tax liability.
You have informed me twice now that the three party exchange (note: it’s more accurate to call it a four party exchange, in my opinion - 1) exchanger; 2) QI; 3) buyer of relinquished property; and 4) seller of replacement property) using a QI is the most common type of exchange used today. Considering that accommodating exchanges is what I do for a living, I am well aware of that. :rolleyes
To conclude, here’s a copy and paste from the FAQs section of the only national association that is dedicated to the exchange industry, the Federation of Exchange Accommodators: "Q - What is Mortgage Boot? A - Mortgage Boot consists of liabilities assumed or given up by the taxpayer. The taxpayer pays mortgage boot when he assumes or places debt on the replacement property. The taxpayer receives mortgage boot when he is relieved of debt on the replacement property. If the taxpayer does not acquire debt that is equal to or greater than the debt that was paid off, they are considered to be relieved of debt. The debt relief portion is taxable, unless offset when netted against other boot in the transaction."
The point that I am trying to make for a delayed exchange is that THERE IS NO DEBT RELIEF when the exchangor trades equal or up in value and all the exchange proceeds are invested in the replacement property.
To illustrate my point, let’s consider the extreme case where the replacement property of equal or higher value is acquired with no debt at all even though there was debt on the relinquished property.
Since the replacement property is equal or greater in value than the relinquished property and there is no new debt or replacement debt, then the exchangor, by default, has to bring cash to the settlement table to accomplish the exchange.
Let me illustrate with an example. The relinquished property is sold for $100K and during the settlement a $20K loan balance is paid off, leaving $80K in net exchange proceeds. For simplicity let’s ignore closing and settlement costs on both legs of the exchange.
The exchangor properly identifies and subsequently acquires a replacement property valued at $120K. Since there is no new debt and no debt is being replaced, the exchangor will have to bring $40K in cash to the settlement table to cover the shortfall between the purchase price and the exchange proceeds.
Now, when all is said and done, the exchangor has received $20K in mortgage boot but has given $40K in cash boot. The cash boot given cancels the mortgage boot received. Since there is no NET mortgage boot, then there is no debt relief and no tax implications arise.
Therefore, in the end, there is really no requirement to trade equal or up in debt as long as the replacement property value is equal to or greater than the relinquished property and all of the exchange proceeds are applied to the replacement property acquisition.
You are correct that most delayed exchanges do replace debt and the question never arises. I am simply taking issue with your assertion that debt has to be replaced (equal or higher) in a fully tax deferred delayed exchange. As you can see from my illustration, the exchange is still fully tax deferred even though the exchangor did not “mortgage up”.
You’re beating a dead horse. The quote from the FEA FAQs section said exactly what you said in your last post in a whole lot fewer words. I get the feeling that you just want to have the last post in this thread. If that’s the case, add one after this because I’m done here.
The main reason my husband and I were able to build a multi-million dollar real
estate portfolio in less than eight years is because we found a few trustworthy
people with money to become our partners.
Recently though, we faced our first challenge with one of our partners.
He had a very busy, growing and consuming business. It was next to impossible
to get quick decisions from him.
After years of frustration over how hard it was to get in touch with him,
he and my husband concluded that it would be best to break up the partnership.
It was too much work for us to always try and track him down, and he recognized
that he was not contributing anything of value to the partnership anymore.
