Three boot deals, priced

The pattern worth learning is in the second one.

A. The trade-down: $102,671 saved

A retiring owner in California sells at $4.2m with $250,000 of selling costs and pays off a $1.6m loan at closing. The replacement costs $2.6m, with a new $900,000 loan. Adjusted basis $1.0m, of which $500,000 is straight-line depreciation; no cost segregation. Other income $140,000. The owner takes $400,000 at closing, and the other $250,000 of exchange money the replacement does not need comes back too: $650,000 of cash in all.

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 $152,421 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 10.07% pre-tax instead of 5%.

Where the saving comes from: in one year, $1.35m of gain on top of $140,000 of income pushes the building-depreciation layer to its 25% ceiling, triggers the alternative minimum tax and puts nearly all of it above the net investment income tax line. Ten slices of $65,000 land lower. The saving splits four ways:

The note route still pays $237,802 in year one, on the $700,000 of debt relief that cannot be spread. Plan the cash for it.

Go deeper: what counts as 1031 boot, how it is taxed and how to spread it on Big Sale Tax.

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. That is a third of the purchase price, 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. This 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.