Boot is any cash or non-like-kind property you receive in a 1031 exchange, and it triggers capital gains tax on the lesser of your realized gain or the boot received. It comes in three forms: cash boot (taking money out), mortgage boot (taking on less debt), and hidden boot (prorations, personal property, and certain fees). Even a small amount creates a tax bill.
You can sell an investment property, roll the full proceeds into another one, and defer the capital gains tax you would otherwise owe that year. That is the point of a 1031 exchange. Boot is where the deferral leaks.
Boot is any part of the deal that is not like-kind real property: cash that comes back to you, debt that goes away, furniture or appliances counted in the purchase price. Whatever you receive as boot is taxed as gain, even when the rest of the exchange is clean.
What you actually pay tax on
There is a ceiling on the damage. The gain you have to recognize now - the slice you pay tax on this year - is the lesser of your total realized gain (the full profit on the sale) or the total boot you received.
Receive $50,000 of boot against a $200,000 gain, and you recognize $50,000. Receive that same $50,000 against a $30,000 gain, and you recognize only $30,000, because your gain caps the amount.
The three sources of boot
Boot comes from three places, and each has its own fix.
Type | What creates it | How to prevent it |
|---|---|---|
Cash boot | Your proceeds exceed the cost of the replacement property, and the excess cash comes back to you | Buy replacement property worth at least your net sale price |
Mortgage boot | Your new mortgage is smaller than your old one, so your debt drops | Replace the debt dollar-for-dollar, or add personal cash to cover the shortfall |
Non-like-kind property boot | Part of the deal involves personal property (furniture, equipment, appliances) that does not qualify as real property under Section 1031 | Keep personal-property allocations out of the exchange and pay for them with non-exchange funds |
Cash boot
Cash boot is the simplest kind. It shows up when your qualified intermediary - the neutral third party that holds your sale proceeds between the sale and the purchase, the QI - has money left over after buying the replacement property.
Say you sell for $500,000 and your QI receives $500,000 in net proceeds. You buy a replacement for $460,000. The remaining $40,000 comes back to you, and that $40,000 is boot, taxable up to the amount of your gain.
Mortgage boot
Mortgage boot is less intuitive. It happens when the debt on your replacement property is smaller than the debt on the property you sold. The IRS treats shedding debt as if you had pocketed the difference in cash.
The math is the old mortgage minus the new mortgage, whenever that number is positive. Sell a property with a $300,000 mortgage, buy one with a $150,000 mortgage, and the $150,000 you no longer owe is mortgage boot.
Cash boot and mortgage boot stack. Add $50,000 of leftover cash to that $150,000, and your total boot is $200,000.
Hidden boot: personal property, fees, and prorations
The trickiest boot never announces itself as cash. Three line items on a settlement statement can create it.
Personal-property allocations. When the settlement statement assigns part of the price to appliances, furniture, or equipment, that slice is not like-kind real property. A $400,000 purchase with $20,000 allocated to personal property leaves only $380,000 of qualifying replacement value.
Certain closing costs paid from exchange funds. Costs that acquire or title the property - title insurance, recording fees, escrow fees - are generally fine to pay from exchange funds. Financing costs (loan origination fees, discount points, lender reserves) and personal costs (inspections, appraisals you pay for) are not; paying them from exchange funds reduces what reaches the property and can create boot. A full breakdown lives in our closing-costs guide.
Prorations at closing. When your QI pays prorated property taxes, insurance, or HOA fees out of exchange funds, those amounts reduce what is applied to the purchase price and can create boot. Paying them from personal funds keeps them out of the boot calculation.
Three exchanges, worked out
The same $600,000 sale can end three ways, depending on what you buy next.
A trade up, fully deferred
Item | Amount |
|---|---|
Sale price | $600,000 |
Old mortgage payoff | $200,000 |
Selling costs (commission, closing) | $36,000 |
Net proceeds to QI | $364,000 |
Replacement purchase price | $650,000 |
New mortgage | $286,000 |
Cash from QI needed at closing | $364,000 |
Cash boot | $0 (all proceeds used) |
Mortgage boot | $0 (new debt exceeds old debt) |
Total boot | $0 |
Recognized gain | $0 |
Buy up, redeploy every dollar of proceeds, and there is nothing left to tax.
A trade down, partial boot
Item | Amount |
|---|---|
Sale price | $600,000 |
Old mortgage payoff | $200,000 |
Selling costs | $36,000 |
Net proceeds to QI | $364,000 |
Replacement purchase price | $450,000 |
New mortgage | $100,000 |
Cash from QI needed at closing | $350,000 |
Leftover cash returned to investor | $14,000 |
Cash boot | $14,000 |
Mortgage boot | $100,000 ($200K old - $100K new) |
Total boot | $114,000 |
Realized gain on sale | $250,000 |
Recognized gain | $114,000 (lesser of boot or gain) |
Assume a combined 25% federal rate: capital gains blended with depreciation recapture, the tax that reclaims the depreciation you deducted over the years. On $114,000 of recognized gain, that is roughly $28,500.
A trade even, boot erased with cash
Item | Amount |
|---|---|
Sale price | $600,000 |
Old mortgage payoff | $200,000 |
Selling costs | $36,000 |
Net proceeds to QI | $364,000 |
Replacement purchase price | $600,000 |
New mortgage | $200,000 |
Cash needed at closing | $400,000 |
Exchange funds applied | $364,000 |
Personal cash added | $36,000 |
Cash boot | $0 |
Mortgage boot | $0 |
Total boot | $0 |
Recognized gain | $0 |
Adding $36,000 of personal cash matches both the sale price and the old debt, and the boot vanishes.
Ways to avoid boot
1. Equal or greater value. Replacement property that costs at least your net sale price leaves no proceeds to hand back, which closes off cash boot.
2. Replace debt dollar-for-dollar. Matching or beating the old mortgage with the new one closes off mortgage boot. Preferring less leverage, you can bring personal cash to cover the gap instead.
3. Buy more than one property. When no single property hits the target value, two or more that add up to it work the same way. They have to be named under the exchange's identification limits: up to three properties of any value (the 3-Property Rule), or any number whose combined value stays within 200% of what you sold (the 200% Rule).
4. Add personal cash at closing. Personal funds you put toward the replacement purchase are not boot; they raise the acquisition price credited to the exchange.
5. Read the settlement statement before you close. Go through every line with your QI and CPA, and confirm which costs come from exchange funds and which from personal funds. Financing costs and prorations paid from personal funds stay out of the boot math.
Run your own numbers
Every boot calculation is specific to your figures. Before you commit to an exchange, our calculator takes your sale price, mortgage balance, planned replacement price, and expected closing costs, and shows your boot exposure and recognized gain.
Full deferral means zero boot: replacement property of equal or greater value, with debt replaced dollar-for-dollar or increased. Anything short of that creates boot and triggers capital gains tax. Our calculator can work through your specific numbers before you commit to an exchange.
Frequently asked questions
What exactly is boot, and why does it trigger tax?
Boot is any money or property you receive that is not like-kind real property. It is taxed because the IRS treats it as though you partially cashed out: receive $50,000 in boot and you are treated as having taken $50,000 in taxable proceeds, subject to capital gains tax up to your recognized gain.
Can I take out $10,000 in cash boot for closing costs?
You can, but you would owe capital gains tax on $10,000 of your gain. At a 20% rate, that is $2,000 in tax on a small amount of cash. Covering closing costs from outside the exchange keeps it boot-free, and the IRS draws no line between "necessary" boot and discretionary boot.
If I pay down my mortgage in the exchange, is that boot?
Yes, this is mortgage boot. If you sell for $500K with a $300K mortgage (net $200K in proceeds) and replace with a $200K property, you have taken $100K of mortgage boot: you are treated as receiving $100K in cash equivalence because your new debt is $100K less.
Do prorations and utility deposits count as boot?
Possibly. Prorations at closing - dividing taxes, insurance, HOA fees, or rent - can count as boot if they are allocated to the exchange. Personal deposits and utility deposits can be boot too if they are not returned. Work with your CPA and QI to allocate these correctly at closing and avoid hidden boot.
How can I avoid boot if I'm downsizing from a $600K property to a $500K property?
You would need to bring additional cash to the closing to bring the replacement up to equal value ($600K). If you cannot, you will have $100K in boot, triggering tax on that much of your gain. The alternatives are to acquire multiple properties totaling $600K or more, or to accept the boot and the resulting tax liability.