Final answer:
The statement is true; in a like-kind exchange, only the net liability assumed by each party is considered boot, and it triggers a taxable event for the party that receives the net benefit. Only the excess liability received over liability given is taxable, and understanding this is crucial for tax implications in property exchanges.
Step-by-step explanation:
The statement that if each party in a like-kind exchange assumes a liability of the other party, only the net liability given or received is considered boot is true. A like-kind exchange, often referred to in the context of Section 1031 of the U.S. Internal Revenue Code, allows for the exchange of similar properties without the immediate tax implication that usually accompanies the sale of property. This deferment of tax continues as long as the exchange is purely of like-kind properties.
However, the introduction of liabilities or mortgages in the exchange can complicate the tax situation. If one party's assumed liability is greater than the other's, the difference is treated as "boot." Boot is the term used for additional value received by a party during an exchange that is not of like-kind property. It can be in the form of cash, relief of debt, or other property that differs from the type being exchanged. In the eyes of the IRS, boot triggers a taxable event. This means that the receiving party will owe taxes on the fair market value of the boot received, which is considered as gain.
To illustrate, if Party A assumes a liability of $10,000 of Party B, and Party B assumes a liability of $15,000 of Party A, then Party A has a net receipt of $5,000 ($15,000 - $10,000). This $5,000 is considered boot and Party A would be responsible for the tax implications of that boot. The key point to understand here is that it's the difference in liabilities that matters. Each party doesn't need to pay taxes on the entire liability assumed—it's only the net difference that's taxable. Thus, the responsibility to report income and pay taxes lies with the party that receives the benefit of the net liability.