Related DST offerings
One replacement option some exchangers consider is a Delaware Statutory Trust (DST): fractional ownership of institutional real estate that can qualify as like-kind replacement property in a 1031 exchange. The directory lists 179 Active DST offerings, each built from its SEC filings. Active means an SEC filing in the last 15 months and not reported fully subscribed. It does not confirm you can still invest.
- Active 1031 DST offerings179 Active
New to DSTs? What is a DST?
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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 is one way to close the gap. Strictly, a $564,000 replacement, equal to the net sale price after the $36,000 of selling costs, with the same $200,000 loan would also leave zero boot.
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.
A pre-closing boot check
Boot is easiest to fix before the replacement closes. Run through these with your QI and CPA using the settlement statements for both closings.
- Price. Is the replacement price at least your net sale price?
- Debt. Compare the loan paid off on the old property with the new loan. Ask your QI how any accrued interest paid at the payoff is handled.
- Selling costs. For each line on the sale (commission, title, recording, transfer tax, the QI fee), does it come from exchange proceeds or your own funds?
- Buying costs. Same question for each line on the purchase. Financing costs are the ones to keep out of exchange funds; ask your QI about inspection and appraisal fees.
- Credits and prorations. Ask your QI how rent, tax and deposit credits are settled at each closing, and whether any of them is paid from exchange funds.
- Cash to you. Does either statement show any amount paid to you? Cash you keep is boot.
- Personal property. Is any part of either price allocated to furniture, appliances or equipment?
- The tally. Write down the boot from each source, even when it is zero, and agree the total with your CPA before you close.
One point on offsets: cash you add at closing can cover a drop in debt, but taking on more debt does not cancel cash that comes back to you.
After closing, the boot reported on Form 8824 should agree with the final settlement statements. A return that shows no boot while the statement shows exchange funds paying non-exchange costs is a mismatch.
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.
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, taxed up to the amount of your realized 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. Sell for $500K with a $300K mortgage (net $200K of proceeds) and buy a $200K property with no loan, and your debt drops by $300K. That $300K is mortgage boot, taxable up to your gain. To avoid it, buy at least $500K of property and cover the extra $300K with a new loan or your own cash.
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?
On a $500K purchase alone you can't avoid it: the replacement has to cost at least your net sale price. Either add a second property, or a DST interest, to bring the total up to that net price, or accept the shortfall, up to $100K, as taxable boot. Extra cash only offsets a smaller mortgage; it can't make up for buying less property.