Final answer:
In the context of like-kind exchanges under Section 1031 of the Internal Revenue Code, cash and non-like-kind property are referred to as 'boot', which can trigger taxable gain for the recipient of the boot. Properly accounting for the boot is crucial in these exchanges to ensure tax compliance and to minimize unintended tax liabilities. The correct option in the final answer is 1) Boot.
Step-by-step explanation:
For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot. In the context of a like-kind exchange, which is a tax-deferral strategy under Section 1031 of the Internal Revenue Code, the term 'boot' represents any form of property, whether it's cash or other property, that is not of a like-kind nature with the property being exchanged.
When engaging in a like-kind exchange, if the exchange includes boot, the recipient of the boot may have to recognize the fair market value of the boot as taxable gain. However, this taxable gain is usually limited to the lesser of the gain realized on the exchange or the fair market value of the boot. It's essential for those participating in such exchanges to properly account for boot in order to comply with tax regulations and to avoid unintended tax consequences.
By properly structuring a 1031 exchange, taxpayers aim to defer capital gains taxes by exchanging properties of similar nature or use. But it's important to recognize that while the swap of real property can often be tax-deferred, the introduction of cash or non-like-kind property will increment the tax liability to the extent of the value of the boot received.