1031-exchange-guide) Boot Explained: What Triggers Taxes and How to Avoid It

A 1031 exchange promises full tax deferral — but only if you follow the rules precisely. One of the most misunderstood aspects of a [like-kind exchange](/blog/1031-exchange-for-beginners) is "boot." Boot is the portion of your exchange that doesn't qualify for tax deferral, and even a single dollar of boot can generate a surprise tax bill.

This guide breaks down every type of boot, explains when it becomes taxable, and shows you how to structure your exchange to avoid it entirely.

What Is Boot in a 1031 Exchange?

In a 1031 exchange, "boot" is any value you receive that is not like-kind property. The IRS requires that you reinvest all proceeds from your relinquished property into a replacement property of equal or greater value. Anything that falls short of that standard — cash, debt reduction, non-qualifying property — is considered boot and becomes taxable in the year of the exchange.

Boot is taxed at capital gains rates, which can be:

0%, 15%, or 20% for long-term capital gains (depending on your income)
25% for [depreciation recapture](/blog/depreciation-real-estate-guide) (Section 1250 unrecaptured gain)
Plus the 3.8% Net Investment Income Tax for higher earners

The IRS does not require you to avoid all boot — it simply taxes whatever boot you receive. But most investors pursue exchanges precisely to defer 100% of their tax liability, making boot avoidance the primary goal.

The Three Types of Boot

1. Cash Boot

Cash boot occurs when you receive cash proceeds from the exchange. This can happen in several ways:

Direct cash back: If your relinquished property sells for $800,000 and you purchase a replacement property for $750,000, the $50,000 difference is cash boot.

Excess debt payoff: If your exchange [qualified intermediary](/blog/1031-exchange-rules-2026) (QI) pays off a mortgage balance and the remaining proceeds aren't reinvested in like-kind property, those leftover funds become cash boot.

Earnest money returned: If a replacement property deal falls through and your earnest money is returned to you during the exchange window, it may constitute cash boot.

Closing cost reimbursements: Certain closing costs are not "exchange expenses" and receiving payment for them can create boot. Exchange expenses that are legitimately offset include broker commissions, legal fees, QI fees, and transfer taxes. Personal property costs, loan fees, and prorated rent are generally not exchange expenses.

2. Mortgage Boot (Debt Relief Boot)

Mortgage boot — also called "debt relief boot" — occurs when the debt on your replacement property is less than the debt on your relinquished property.

Example:

Relinquished property: $1,000,000 sale price, $400,000 mortgage payoff
Replacement property: $1,000,000 purchase price, $200,000 new mortgage

Even though the purchase price is equal, you've been relieved of $200,000 in debt. That $200,000 net debt reduction is mortgage boot and is taxable.

How to offset mortgage boot: You can offset mortgage boot by paying cash into the exchange to make up the difference. In the example above, adding $200,000 in cash to the purchase eliminates the mortgage boot entirely.

3. Personal Property Boot

The Tax Cuts and Jobs Act of 2017 eliminated 1031 exchange treatment for personal property (vehicles, equipment, artwork, etc.). If your exchange includes personal property along with real estate, the personal property portion is treated as boot.

This rarely affects residential or commercial real estate investors, but matters for those exchanging properties with significant personal property components (e.g., a furnished vacation rental where the furniture is separately appraised and included in the sale).

The Equity and Debt Replacement Rules

To avoid any boot, you must meet both of these requirements:

Equal or greater equity: The equity in your replacement property must equal or exceed the equity in your relinquished property.
Equal or greater debt: The debt on your replacement property must equal or exceed the debt on your relinquished property (or you must compensate with additional cash equity).

Think of it as two separate buckets that must both be filled:

Requirement	Relinquished Property	Replacement Property
Total value	$1,000,000	≥ $1,000,000
Debt	$400,000	≥ $400,000
Equity	$600,000	≥ $600,000

If either bucket comes up short, you have boot equal to the shortfall.

Common Scenarios That Create Unexpected Boot

Trading Down in Value

This is the most obvious boot scenario. If you sell a $1M property and buy a $900K replacement, you have $100K of cash boot (assuming the QI holds all proceeds).

Refinancing Before Exchange

If you [cash-out refinance](/blog/cash-out-refinance-guide) your relinquished property before initiating a 1031 exchange, the IRS may "relate back" the refinancing and treat the cash-out proceeds as taxable. The closer the refinancing is to the exchange, the greater the scrutiny. As a rule of thumb, refinancing within 6 months of an exchange attracts IRS attention.

Receiving Personal Property in the Sale

If a buyer pays separately for appliances, furniture, or fixtures and that amount is included in your sale proceeds held by the QI, you may have non-qualifying boot if the personal property can't be exchanged.

Failing to Reinvest Closing Costs

Not all closing costs qualify as exchange expenses. If you pay for a home warranty, prorated HOA dues, or moving costs from exchange funds, those amounts become cash boot.

Strategies to Eliminate or Minimize Boot

Strategy 1: Buy Up in Value

The simplest approach is to purchase replacement property worth more than what you sold. This eliminates equity boot entirely. Excess equity simply increases your deferred gain basis in the new property.

Strategy 2: Match or Increase Debt

Structure your replacement property financing to carry at least as much debt as your relinquished property. If you're paying down or eliminating debt, compensate with additional cash from personal funds (not exchange funds).

Strategy 3: Add Cash to the Exchange

If you find your ideal replacement property but it would create mortgage boot, you can contribute personal cash to close the debt gap. This is sometimes called "topping off" the exchange.

Strategy 4: Use Multiple Replacement Properties

The 1031 identification rules allow you to identify up to three replacement properties. Using multiple properties gives you more flexibility to match the total value of your relinquished property and avoid boot.

Strategy 5: Carefully Separate Personal Property

If your sale includes both real and personal property, work with your QI and tax advisor to separately allocate and exclude personal property from the exchange — or ensure it's minimal enough not to matter.

What Happens When You Accept Boot

Sometimes boot is unavoidable or strategically acceptable. If you receive boot, here's how it's treated:

Boot is taxable in the year of the exchange, even if the exchange otherwise qualifies under Section 1031.
Boot is allocated first to depreciation recapture (taxed at 25%), then to long-term capital gain (taxed at 0–20%).
The remaining gain (after boot is recognized) continues to be deferred.

Example: You have $300,000 of total gain, including $80,000 of depreciation recapture. You receive $50,000 of cash boot. The $50,000 is taxable — $50,000 allocated to depreciation recapture (taxed at 25%). The remaining $250,000 of gain is deferred.

Boot and the Qualified Intermediary's Role

Your QI holds all exchange proceeds and ensures they never pass through your hands. Constructive receipt — even momentarily touching the funds — disqualifies the entire exchange, not just that amount.

Boot is different: your QI can legitimately distribute boot to you after the exchange closes, but it must report the amount to the IRS and you'll owe taxes on it.

Work closely with your QI throughout the exchange to:

Track potential boot before closing
Identify whether closing costs qualify as exchange expenses
Coordinate additional cash contributions to offset mortgage boot

Boot in Reverse Exchanges and Build-to-Suit Exchanges

Reverse exchanges (where you acquire the replacement property before selling the relinquished property) follow the same boot rules. The exchange accommodation titleholder (EAT) holds one of the properties until the exchange is complete.

Build-to-suit exchanges (also called improvement exchanges) allow you to use exchange funds for construction on the replacement property. This can help you spend down proceeds that would otherwise become boot — but the improvements must be completed and the property transferred within 180 days.

Working with a 1031 Exchange Specialist

Boot calculations can become complicated quickly, especially with multiple properties, [seller carryback](/blog/seller-financing-guide) financing, or depreciation from partial asset dispositions. Always work with:

A qualified intermediary (QI) who is independent from your transaction
A CPA specializing in real estate exchanges
A 1031-experienced [real estate attorney](/blog/how-to-build-real-estate-team) for complex structures

The IRS provides guidance in Revenue Procedure 2000-37 and Treasury Regulation §1.1031 for those who want to go deeper.

How HonestCasa Can Help

If you're planning a 1031 exchange and need to finance a replacement property, loan structure directly affects your boot exposure. A DSCR loan on the replacement property can help you achieve the right debt level to avoid mortgage boot — without requiring income documentation that might delay your 180-day window.

[Learn more about [DSCR loans](/blog/best-dscr-lenders-2026) for 1031 exchanges →](/blog/dscr-loan-1031-exchange)

1031 Exchange Boot Explained: What Triggers Taxes and How to Avoid It

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