Three boot deals, priced

The pattern worth learning is in the second one.

A. The trade-down — $71,857 saved

A retiring owner in California sells at $4.2m, buys at $2.6m, sheds $1.6m of debt and takes $400,000 at closing. Other income $140,000. Straight-line depreciation only — no cost segregation.

The yield case is the larger half, and it is a fair fight: both routes are invested at the same 5%, and growth on both is taxed at the same 36.9% marginal rate. The only difference is when the tax comes out.

The cash route starts with $151,892 because the tax bill covers all $1,350,000 of boot — including the $700,000 of debt relief that arrived with no money attached. To finish level, the cash would have to be reinvested at 9.17% pre-tax instead of 5%.

Why it works is worth being precise about, because it is not the 25% ceiling. At $140,000 of other income the §1250 layer is taxed at 22% whether it arrives all at once or in ten slices — the ceiling never binds. The saving splits three ways:

The largest single piece is the NIIT. A $1.35m boot lands entirely above the $250,000 MAGI threshold; ten slices of $65,000 on top of $140,000 of income mostly sit under it. California's progressive brackets do the same work again at the state level.

B. The cost-seg deal — a note saves nothing

A $3.5m sale that keeps $400,000 at closing, no debt relief, other income $180,000. The property cost $1.5m and a cost segregation study moved $500,000 of it into 5-, 7- and 15-year property — a third of the purchase price, which is an ordinary result for a study.

The boot is smaller than case A and still completely unstructurable. §453(i) recognizes depreciation recapture in full in the year of sale however the payments are arranged, and recapture comes off the front of the boot before any other layer — so a $400,000 boot against $500,000 of §1245 property is all recapture and nothing else. Both routes end at exactly $441,894.

This is the deal to walk away from, and the reason to ask about cost segregation before promising anything. The same study that produced years of accelerated deductions is what makes the exit unstructurable.

C. The big cash boot — $135,785 saved

A Texas seller at $6m buys at $3.2m and keeps $2,450,000. Other income $90,000. No debt on either side.

Over 20 years the note ends at $4,360,498 against $3,805,797 — the cash route needs 5.95% pre-tax to tie a 5% note.

No state tax in Texas, so every dollar saved here is federal: a $2.45m gain stacked on $90,000 of income runs into the 20% bracket and the 3.8% NIIT, and spreading it over fifteen years keeps most of it below both.

What decides it

Three things, in order:

1. What the boot is made of. §1245 recapture never moves. Debt relief never moves. Only what is left can ride a note.
2. The seller's other income. The same boot is worth structuring for one seller and pointless for another — that is the input that changes the answer most.
3. The term. Longer is not automatically better: past a point the §453A(c) interest charge on the deferred tax costs more than the extra spreading saves.

Run your own deal through the calculator — it prices all three and says plainly when the answer is to take the cash.