What Is Boot in a 1031 Exchange?

A 1031 exchange postpones tax on value that stays invested in real estate. Boot is the part that doesn't stay invested. The IRS looks at everything you walked away with that isn't the replacement property and taxes your profit to that extent.

The two flavors

Cash boot is the obvious one: sale money that ends up in your pocket. Maybe you deliberately kept $50,000 for other plans, or maybe your new property simply cost less and the leftover cash came back to you at the end. Either way, it's taxable.

Mortgage boot is the sneaky one. Paying off a $300,000 loan and replacing it with a $250,000 loan means you were relieved of $50,000 of debt — and the IRS treats debt relief like money received. You can neutralize mortgage boot by adding $50,000 of fresh cash from outside the exchange, but the reverse doesn't work: taking on extra debt can't offset cash you received.

How boot is taxed

Boot is taxable only up to your total profit — you never pay tax on more gain than you have. But the taxed slice comes out of your depreciation recapture first, at up to 25%, before any of it gets the friendlier capital gains rate. That ordering is why a "small" amount of boot often carries a bigger bill than people expect.

Example Your profit is $350,000, of which $100,000 is past depreciation. You take $40,000 of cash boot. That $40,000 is taxed entirely at the 25% recapture rate — a $10,000 bill — while the remaining $310,000 of profit stays deferred.

Calculate your boot and the tax on it →Enter your sale, loan, and purchase numbers to see cash boot, mortgage boot, and the bill

Boot isn't failure

Taking boot on purpose is a legitimate strategy — a partial exchange. Need $75,000 for another investment or a kid's tuition? Take it as boot, pay tax on that slice, and defer the rest. The mistake isn't boot itself; it's boot created by accident, usually by trading down in price or debt without noticing.

Common Questions

Is boot illegal or against the 1031 rules?

Not at all. Boot just means part of your exchange is taxable. The exchange remains valid for everything you did roll over.

Do closing costs create boot?

Standard transaction costs like commissions, title, and escrow fees generally reduce your exchange numbers without creating boot. Items like prorated rent, security deposits transferred, or loan fees can create small amounts of boot — your intermediary and tax preparer watch for these.

Can I avoid mortgage boot by paying cash for the new property?

Yes. Debt relief can be offset with new cash from outside the exchange. If you paid off a $300,000 loan, buying the replacement with $300,000 of fresh cash and no loan leaves no mortgage boot.