Yesterday, we learned the difference between realized gain, recognized gain, and boot. Today, we will examine some examples of 1031 exchanges and apply our new vocabulary to the situations that they present.

In our first example below, we see that the investor sold a property for $180,000 and bought one for $400,000. The mortgage on new property was greater than the one it replaced, and the same amount of equity remained in the investment. This is a picture-perfect 1031 exchange. No boot was received by the investor, so there is no corresponding recognized gain.

In the next example, the investor sold a property for $400,000 and bought one for $300,000. While the equity in the investment remained the same, the mortgage amount for the new property was $100,000 dollars less than it was for the old property. This will be seen as "mortgage boot," and there will be a recognized gain that must be taxed.

In the final example, the investor sold a property for $300,000 and replaced it for one of the same value. The investor increased the debt, but reduced the equity in the investment by $40,000. This $40,000 will be treated as "cash boot," and there will be a recognized gain that must be taxed.