Boot is the amount of money, oftentimes, in cash, or other property used to transfer and exchange to make a traded transaction fair. Under the tax code, cash boot can be used in real property transfers.
Property can be exchanged between property owners. This process is commonly used amongst businesses that exchange assets in return for other property, including intentional rights such technology, information, and others.
Because different real estate properties have different equity, the party that gains additional value may be subject to taxation. This is called boot.
Boot is the term used to describe the taxable income that is placed on the transferee that retains the new equity.
Benefits of Boot
Not only are boot transactions a favorable solution in situations where it is difficult to find similarly priced assets, a boot can mean beneficial taxation. Even though during transactions, such as real estate transactions, the foundation of the deal is tax-deferred, the boot is considered to increase the value of the item.
In other words, a boot is considered to be a taxable gain. This means that different tax rates can apply to the item on the receiving end of the boot.
So, in boot transactions the recipient may end up paying less in capital gain taxes than if he or she had actually sold the property in order to purchase another property. Thus, to avoid or reduce the heavy taxation that would otherwise occur in typical real estate transactions, it is popular to participate in transactions involving boot.