1031 Exchange Boot Explained (With Examples)
Short answer: Boot is anything you receive in a 1031 exchange that isn’t like-kind real property, usually leftover cash or debt that is paid off and not replaced. Boot is taxable up to the amount of your gain. To defer all of the tax, buy replacement property of equal or greater value, reinvest all the net cash and replace the debt you paid off.
- Cash boot: sale proceeds you keep or that aren’t reinvested.
- Mortgage boot: a lower loan on the new property than the one paid off, without adding cash to make up the difference.
- Recognized gain is the lesser of the boot or your total gain, and depreciation recapture is taxed first.
- Adding your own cash can offset mortgage boot; taking on more debt can’t offset cash boot.
A quick refresher on 1031 exchanges
A 1031 exchange lets you sell investment or business real estate and defer capital gains tax and depreciation recapture by reinvesting in like-kind real property. The proceeds must go to a qualified intermediary, and you have 45 days from the sale to identify replacement property and 180 days to close.
The exchange is only fully tax-deferred if you don’t walk away with anything other than real estate. Anything else is boot.
Cash boot
Cash boot is the simplest kind: money from the sale that you receive or that isn’t used to buy the replacement property. Common sources are trading down to a cheaper property, taking some cash out at closing, or using exchange funds for non-qualifying costs such as loan fees or security deposits.
Mortgage boot (debt relief)
If the loan on the property you sell is paid off, that debt relief counts as value received. If the loan on your replacement property is smaller and you don’t add cash to make up the difference, the shortfall is mortgage boot, even though you never touched any cash.
How boot is taxed
Recognized (taxable) gain = the lesser of total boot received or your realized gain
The recognized gain is taxed first as depreciation recapture (unrecaptured Section 1250 gain, at your ordinary rate up to 25%), up to the depreciation you took, and then at long-term capital gains rates. The rest of the gain stays deferred.
Example 1: Trading down creates cash boot
You sell a rental for $600,000 and pay 5% in selling costs, leaving $570,000. Your adjusted basis is $250,000, so your realized gain is $320,000. The sale pays off a $200,000 mortgage, leaving $370,000 with your qualified intermediary.
You buy a replacement property for $520,000 with a new $200,000 loan and $320,000 of the exchange funds. The other $50,000 is returned to you.
| Item | Amount |
|---|---|
| Realized gain | $320,000 |
| Cash boot received | $50,000 |
| Recognized (taxable) gain | $50,000 |
| Gain still deferred | $270,000 |
With no depreciation taken, the $50,000 is taxed as long-term gain: about $7,500 at 15%, plus any state tax and net investment income tax. If you had taken depreciation, up to $50,000 of it would be taxed at up to 25% first.
Example 2: A smaller loan creates mortgage boot
Same sale, but you buy a $520,000 property using all $370,000 of exchange funds and a new loan of only $150,000. Your old $200,000 loan was paid off; the new loan is $50,000 smaller and you didn’t add cash to cover it.
| Item | Amount |
|---|---|
| Debt paid off | $200,000 |
| New debt | $150,000 |
| Mortgage boot | $50,000 |
| Recognized (taxable) gain | $50,000 |
Had you bought a $570,000 property (using the $370,000 plus a $200,000 loan), there would be no boot at all.
How to avoid boot
- Buy replacement property worth at least your net sale price (sale price minus selling costs).
- Reinvest all of the net cash held by your qualified intermediary.
- Replace the debt you paid off with new debt of at least the same amount, or add your own cash to make up any shortfall.
- Pay non-exchange expenses (loan fees, prorated rents, deposits) with outside funds, not exchange proceeds.
Note the asymmetry: adding your own cash can offset mortgage boot, but taking on more debt does not offset cash boot you receive.
Frequently asked questions
What is boot in a 1031 exchange?
Boot is any value received that isn’t like-kind real property, most often cash you keep or net debt relief. Boot is taxable up to the amount of your realized gain.
Is all boot taxed?
Boot is taxed only up to your realized gain. If boot exceeds the gain, the excess isn’t taxed. If you have little or no gain, boot may create little or no tax.
Can I take some cash out and still do a 1031 exchange?
Yes. A partial exchange is allowed: the cash you take is boot and taxable, while the rest of the gain stays deferred.
Do closing costs count as boot?
Normal selling and exchange costs (commissions, title and escrow fees, qualified intermediary fees) generally reduce the amount realized and don’t create boot. Non-transaction costs paid from exchange funds, such as loan fees or prorated rents, can.
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This guide explains general federal tax rules for educational purposes and is not tax, legal or financial advice. Rules change and depend on your situation. Consult a qualified tax professional before acting.