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Boot is the part of a 1031 exchange that doesn't defer, and it turns up in more places than a leftover check from the qualified intermediary. Cash you don't reinvest is boot. Debt you don't replace is boot. Any 1031 exchange boot calculator, whether it's software or a five-row spreadsheet, has to track those two figures separately, because the netting rules between them run in only one direction. Get either side wrong before closing on replacement property and tax can land on a transaction that was structured specifically to defer it.
Why the two numbers decide the outcome
Intent doesn't enter into it. Two figures drive the result: how much cash came out of the exchange, and how far the debt balance dropped between the relinquished property and the replacement property. Either gap produces recognized gain — limited to the gain realized on the exchange, and potentially taxed in part as depreciation recapture rather than entirely at capital gain rates.
That makes debt structure on the replacement side more than a yield question. A reduction in mortgage balance that isn't offset with new cash is what practitioners call mortgage boot, and it is taxable whether or not any cash proceeds were touched. How a replacement asset is financed — including how a DST is capitalized at the trust level — determines whether that gap opens at all.
Nor is this math that a CPA can simply clean up later. The 45-day identification period and the 180-day exchange period run concurrently from the closing of the relinquished property, and the identification and purchase decisions made inside those windows fix the boot exposure long before a return is prepared. The filing reports the number; it doesn't change it.
What you'll need before you start
- The settlement statement from the sale of the relinquished property, showing net proceeds after closing costs
- The payoff statement for any mortgage on the relinquished property, including prepayment penalties
- The purchase contract or subscription agreement for the replacement property, with debt terms if any
- The qualified intermediary's accounting of funds held and disbursed
- A basic spreadsheet or calculator; this is arithmetic, not modeling
- A CPA or exchange accountant to confirm the final figures before filing
The steps
1. Total your net exchange proceeds
Start with net proceeds from the sale, not the gross sale price. Subtract closing costs, broker commissions, and prorated items paid at closing, then reconcile the figure against the qualified intermediary's statement rather than an internal estimate. Using the contract sale price instead of the amount that actually landed with the intermediary is a common error, and the two can differ by tens of thousands of dollars once transaction costs come out.
2. Record the relinquished property's mortgage balance
Pull the exact payoff amount rather than the balance on the last monthly statement, since payoff figures often include accrued interest or prepayment fees that move the number by closing. That balance is the debt figure to match or exceed on the replacement side. Skipping this step is the most common reason investors find mortgage boot after an exchange instead of before it.
3. Total the replacement property's price and financing
Add up the purchase price of everything being identified and acquired — one property, a DST allocation, or several. Where the replacement includes new financing, note the loan amount separately from the equity being contributed. A $900,000 relinquished property with a $400,000 mortgage payoff needs at least $400,000 of new debt, additional cash, or some combination of the two to replace that leverage in full.
4. Compare debt levels on both sides
Subtract new replacement debt from old relinquished debt. If the new debt is lower, the difference is mortgage boot unless cash covers the gap. A leveraged DST carries debt set at the trust level, and the loan-to-value or debt-to-equity figures live in the offering documents — that is the number this comparison needs, not a figure quoted anywhere else. Worth knowing how the data is organized if you are screening: the Top1031 directory tags each offering's leverage categorically — all-cash, leveraged, zero-coupon, or unknown — as a way to sort the universe, while the actual ratio comes from the filing itself.
5. Compare total value reinvested against net proceeds
Add the equity contribution and the new debt, then set that sum against total net proceeds from step 1. Undeployed cash left over is cash boot, recognized to the extent of realized gain no matter how modest the balance. Partial allocations are where this surfaces: if minimum investment sizes leave $15,000 unallocated because the proceeds didn't divide evenly across offerings, that $15,000 is boot.
6. Net the two categories using the correct offset rule
Cash contributed into the purchase can offset mortgage boot. The reverse never works — cash boot received cannot be offset by taking on additional debt. Short $50,000 on debt replacement but adding $50,000 of outside cash to the replacement purchase eliminates the mortgage boot. Leave $50,000 of unspent proceeds sitting with the intermediary and no amount of new financing removes it from the calculation.
7. Test the structure against the exposure you actually have
Where the relinquished property carried significant debt, an all-cash DST replaces none of it; matching that payoff would require adding cash equal to the retired debt, because a debt-free structure has no financing to substitute. Investors coming off heavily leveraged property therefore sometimes look at leveraged replacement structures for boot-math reasons rather than yield reasons. Both structures, and the terms that distinguish them, are defined in the Top1031 Learn library.
8. Confirm the final figures with a qualified professional
Boot interacts with adjusted basis, depreciation recapture, and multi-property exchanges in ways that go past arithmetic. A CPA or exchange accountant should verify the numbers against the actual closing statements before the return is filed, not after.
Troubleshooting
More debt relief than cash available to offset it. The options are outside cash added to the replacement purchase, more debt on the replacement side, or recognized gain. The offset rule doesn't provide a fourth.
Gross sale price used instead of net proceeds. Redo step 1 from the intermediary's actual disbursement statement. The gap between gross and net is often the entire source of a boot scare that isn't real.
Multiple replacement properties or DST allocations. Total all debt and equity across every replacement asset before running the comparison. Boot is calculated on the aggregate exchange, not asset by asset.
A minimum investment leaves proceeds stranded. Even $5,000 unspent with the intermediary at the deadline is cash boot. Run the remaining allocation math before the 45-day identification window closes.
Zero-coupon structures in the mix. These typically make little or no current distribution during the hold, but distribution timing has no bearing on entry-stage boot. The calculation still rests on equity and debt at close.
Basis questions appearing at exit rather than entry. Boot at entry and basis at exit are related but separate. Debt assumed through a DST allocation carries into adjusted basis, which is a different number than the boot computed at the time of the exchange.
Documents that carry the authoritative numbers
- The qualified intermediary's final accounting, the controlling source for net proceeds
- The lender's payoff letter for the relinquished property, dated as close to closing as possible
- The offering's capital structure section, where trust-level debt terms are disclosed
- A CPA experienced specifically in 1031 exchanges
- A spreadsheet holding relinquished debt, replacement debt, net proceeds, and cash contributed side by side
Compare DST structures before you allocate
Every tracked offering and sponsor record, built from SEC filings.
Where the analysis goes next
With the boot math settled, the open question becomes which replacement structures match the debt profile that has to be replaced — a DST allocation, a direct purchase, or a combination — and how financing terms differ across them. Offering-level debt tags, sponsor records, and Sponsor Grades (assigned at the sponsor level, A through F or NR, and not a rating of any individual offering) sit in the directory of tracked offerings.
FAQ
What counts as boot in a 1031 exchange?
Cash or other non-like-kind property received, plus net debt relief. Recognized gain from boot is limited to the gain realized on the exchange, and the two categories — cash boot and mortgage boot — are computed separately before they are netted.
Can cash boot be offset by taking on more debt?
No. Unspent net proceeds cannot be cured by increasing debt on the replacement side. The offset runs one way only: cash paid into the replacement purchase can offset debt relief.
Is boot the same as depreciation recapture?
No, though they overlap. Recapture is a characterization question — how recognized gain is taxed, including unrecaptured Section 1250 gain — while boot determines how much gain is recognized in the first place.
Does a DST allocation avoid boot automatically?
No. A DST interest used as replacement property is subject to the same rules as any other. If trust-level debt falls short of the relinquished debt, or part of the proceeds goes unallocated, boot results.
The asymmetry to remember
The offset rule catches more people than the definition of boot does. Cash cures a debt shortfall; debt never cures unspent cash. That is the sentence to have written down before allocation decisions get made under deadline pressure, rather than after the return comes back from the accountant.
Related reading
Definitions of all-cash, leveraged, and zero-coupon structures, along with the mechanics of debt replacement and basis, are collected in the Learn library. Offering-level detail sits in the directory.