Boot is the part of a 1031 exchange that does not qualify for deferral. If you leave cash on the table or replace less debt than you gave up, that amount is generally taxable even when the rest of the exchange is set up correctly. Plan the replacement value and debt before you close, not after the intermediary is holding funds.
This is a boot-only companion. For the full exchange timeline, see A Real 1031 Exchange Timeline for 2026 (What LA Investors Get Wrong). For the identification clock and choosing a qualified intermediary, see The 45-Day Clock: Identification Rules and Choosing a Qualified Intermediary.
What Is Boot?
Boot includes any cash or non-like-kind property you receive during a 1031 exchange. Under Section 1031 of the Internal Revenue Code, those items are not eligible for tax deferral. You must pay tax on the amount classified as boot, subject to your overall gain and the rest of the return.
Types Of Boot
- Cash boot: Cash or cash equivalents you keep from the sale instead of reinvesting through the exchange.
- Mortgage boot: A drop in debt when the replacement property carries less liability than the relinquished property, to the extent that reduction is treated as boot.
IRS Rules On Boot
Section 1031 treats value outside a like-kind exchange as taxable boot. If the replacement property is worth less than the relinquished property, the shortfall is a common source of taxable boot. For real property exchanges, like-kind generally means real property for real property. Cash and personal property are not like-kind to real estate.
How Boot Affects The Deal
Boot reduces how much of the gain you defer. The IRS treats the boot portion as taxable in the year of the exchange.
- Taxable income. You generally pay capital gains tax on cash or other property received as boot, limited by your realized gain.
- Reduced deferral. To aim for full deferral, replace with property of equal or greater value and replace the debt you gave up, unless other facts change the math.
For example, if you sell a property for $500,000 and buy one for $450,000, you have $50,000 in boot. That creates a taxable event. Boot is taxed first as depreciation recapture, up to 25% federal for unrecaptured Section 1250 gain, then at 15% or 20%. Add 3.8% net investment income tax for many investors and California tax of up to 13.3%. On $50,000 of boot, a California investor in a high bracket can owe well over $15,000.
Strategies Investors Use To Limit Boot
- Buy equal or greater value. Reinvest the full net proceeds into replacement property priced at least as high as what you sold.
- Watch the debt side. Taking on equal or greater mortgage debt on the replacement can help avoid mortgage boot when that is the gap.
- Co-ownership. A tenancy-in-common (TIC) interest is sometimes used to help match value when a whole property does not fit. Structure and documentation still have to satisfy the exchange rules.
- Combine sales. Sell more than one property and apply the combined equity toward one larger like-kind replacement when the timelines allow.
- Fund improvements or add cash. Additional cash or financing can raise the replacement value when the target property alone is short.
Get The Numbers Reviewed Early
Boot is usually a planning miss, not a surprise form. Model the replacement price and debt against the relinquished property before you sign. For the 45-day identification rules, QI setup, and full timeline, use the companion guides named above.
Book a consultation with LaviCPA today if you want a fact-specific review of boot risk on an upcoming exchange.