Legal Definitions - boot

In legal and financial contexts, boot refers to additional cash or other property that is included in an exchange to equalize the value of the items being traded. While the primary exchange might involve "like-kind" assets or be structured to defer taxes, the "boot" portion typically represents a taxable gain to the recipient because it is not considered part of the qualifying, tax-deferred exchange.

• Real Estate Exchange

  Imagine a property owner wants to exchange an older commercial building they own, valued at $800,000, for a newer, smaller commercial property valued at $700,000. To make the exchange fair, the owner of the newer property agrees to give the first owner the $700,000 property plus an additional $100,000 in cash.

  In this scenario, the $100,000 in cash received by the first property owner is considered boot. Even if the exchange of the two commercial properties qualifies for tax deferral under "like-kind" exchange rules, the $100,000 cash portion would typically be immediately taxable to the recipient.

• Business Asset Trade

  Consider a small manufacturing company that trades an outdated piece of machinery, valued at $30,000, for a more advanced model from another company, valued at $45,000. To complete the transaction, the manufacturing company pays an additional $15,000 in cash to the other company.

  If the company receiving the $15,000 cash were attempting a tax-deferred exchange of assets, that cash would be considered boot to them. This means the $15,000 would likely be recognized as taxable income, even if the exchange of the machinery itself qualified for tax deferral.

• Corporate Reorganization

  During a corporate merger, shareholders of Company A exchange their shares for shares in the newly formed Company B. However, some shareholders also receive a small cash payment in addition to their new shares, perhaps to settle fractional shares or as part of the overall compensation package.

  This cash payment, received alongside the new shares in Company B, is considered boot. While the exchange of shares might be structured as a tax-free event for the shareholders, the cash portion would typically be taxable to the shareholders who receive it.