Boot

What is boot?

Boot is the taxable leakage in a 1031 exchange, any value you receive that is not like-kind real estate. A 1031 exchange only defers tax on value that stays invested in real property; whatever escapes as cash or reduced debt is taxed in the year of the exchange, up to the amount of your total gain.

Boot comes in two main forms. Cash boot is money you pocket: sale proceeds not reinvested, or leftover funds returned by the intermediary after closing. Mortgage (debt-relief) boot arises when the debt on your replacement property is smaller than the debt you paid off on the relinquished property, the IRS treats the reduction as money received, though adding fresh cash can offset it.

The practical rules of thumb for a fully tax-deferred exchange: buy replacement property worth at least as much as what you sold, reinvest every dollar of equity, and take on equal or greater debt (or replace reduced debt with new cash). Partial exchanges are legal and sometimes deliberate, an investor may intentionally take some cash boot and pay tax on just that slice, but accidental boot from sloppy math is one of the most common and avoidable exchange mistakes.

Worked example

You sell a rental for $500,000 (paying off a $200,000 mortgage) and buy a replacement for $450,000 with a $180,000 loan. You received $30,000 of cash boot (equity not reinvested: $300,000 − $270,000) and $20,000 of mortgage boot ($200,000 − $180,000 debt reduction). Roughly $50,000 is taxable now; the rest of the gain stays deferred.

Frequently asked questions

How do I avoid boot in a 1031 exchange?

Follow three rules: buy a replacement property priced at or above your sale price, reinvest 100% of the equity (never let the intermediary return cash to you), and carry equal or greater debt on the replacement, or offset any debt reduction with additional cash from outside the exchange. Also watch closing-statement items like prorated rent and security deposits, which can create small amounts of unexpected cash boot.

Is receiving boot always a mistake?

No, partial exchanges are perfectly legal. An investor who wants to pull $50,000 out for personal use can deliberately take that as cash boot, pay tax on it, and still defer the remaining gain. Boot only becomes a problem when it is accidental, from buying down in price, mismatching debt, or letting stray funds flow back, because the tax bill arrives without the cash having been planned for.

Related tools and guides

• 1031 Exchange Guide
• 1031 Exchange Calculator