Answer :
Final answer:
Generally, the taxpayer is not allowed to offset boot received with boot paid. However, when the taxpayer receives a boot in the form of stocks, the taxpayer is allowed to net any boot paid against the boot received. The correct answer is 3.
Explanation:
When exchanging like-kind properties, a taxpayer is generally prohibited by Section 1031 of the Internal Revenue Code from offsetting boot received with boot paid.
Stocks are one area where an exemption is made. In a 1031 exchange, if a taxpayer receives boot in the form of stocks, they can deduct any boot paid from the boot received. This implies that the amount of boot paid can be deducted by the taxpayer from the total taxable gain from the exchange.
This exception is made because stocks are thought to be more liquid than other assets, like real estate. This implies that it is simpler for a taxpayer to offset the boot received in the exchange by selling stocks and using the proceeds.
Therefore, the correct answer is 3.
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