In order to become entirely tax free in an exchange, you must trade into a more expensive property. If you trade into a property of lesser value you will have received boot, at least equal to the drop in value.
Consider the following exchange where the replacement property had a value of $300K or $200K less than the relinquished property and paid tax on the boot of $200K or $56,000. If on the other hand you decided to split the transaction into a $300K exchange and a $200K sale your tax liability would be cut in half because you would be able to deduct a share of the basis against the $200K sale.
Relinquished Sale Replacement Value 300k 200k 300k Basis 150k 100k Gain Realized 150k 100k Gain Recognized -0-k 100k Tax 20k
If exchanged boot received =$200 and tax is $40K (28% x 200K) 1. Alternative - Split Into Two Parcels. If you split the property either by survey or as an undivided interest, where one parcel is worth $300K and the other $200K, your result can be significantly different. 2. The owner prepares a separate sales contract for each parcel. A) The owner enters into an exchange agreement for the 300K parcel. B) the owner directly sells the 200K parcel. 3. The tax result is that A) The owner will have a tax-free exchange for the 300K parcel. B) The owner will have again on the sale of the 200K parcel of 100K (50% basis deduction) and have a tax liability of $28,000.