J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

5.30 Boot in Like-Kind Exchange Payable in Installments

An exchange of like-kind property is tax free unless boot is received. “Boot” may be cash or notes. If you transfer property subject to a mortgage and the amount of the mortgage you give up exceeds the mortgage you assume on the property received, that excess is boot (6.3). Boot is taxable, and if payable in installments, the following rules apply. Contract price is reduced by the fair market value of like-kind property received. Gross profit is reduced by gain not recognized. “Payment” does not include like-kind property.

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Planning Reminder

Taxable Boot Received in Exchange

If you make an exchange of like-kind property and also receive cash or other property that is payable in one or more future years, you may report the gain using the installment method.

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The same treatment applies to certain tax-free reorganizations that are not treated as dividends, to exchanges of certain insurance policies, exchanges of the stock of the same corporation, and exchanges of United States obligations.

EXAMPLE

In 2012, property with an installment sale basis (basis plus selling expenses) of $400,000 is exchanged for like-kind property worth $200,000, plus installment obligations of $800,000, of which $100,000 is payable in 2013, plus interest. The balance of $700,000 plus interest will be paid ...