Boot is anything you receive in a 1031 exchange that is not like-kind to what you gave up. It comes in three main forms: cash boot (proceeds not reinvested), mortgage boot (a net drop in debt), and hidden boot (closing costs, prorations, personal property). Any boot triggers recognized gain up to the amount received, which the client owes tax on that year.
What boot is, and why it creates a tax bill
A client sells a rental building for $800,000. Their basis is $300,000, so they have a $500,000 gain. They buy a replacement for $700,000 and walk away with $100,000 in cash. That $100,000 is boot, and it turns a fully deferred exchange into a partly taxable one: the client recognizes $100,000 of gain now and defers the other $400,000.
Boot is the catch-all term for anything you receive in a 1031 exchange that is not like-kind to the property you gave up. In real estate deals it is almost always one of three things: cash, a reduction in debt, or a non-real-estate item such as personal property, stock, or a note.
The rule that matters: receive any boot and you must recognize gain up to the amount of that boot. Full deferral of the whole gain is off the table the moment boot appears.
Boot is reported on Form 8824, Part III, and the recognized gain flows to Schedule D of the Form 1040, where it becomes a current-year tax liability.
Cash boot: money the client keeps
Cash boot is the simplest kind: money from the exchange that the client keeps instead of reinvesting in like-kind property.
Downsizing and pocketing the difference
Client sells a rental for $800,000 (adjusted basis $250,000) and wants a smaller property for $650,000, keeping $150,000 in cash.
- Sale proceeds: $800,000
- Purchase price: $650,000
- Cash kept: $150,000
- Realized gain: $800,000 - $250,000 = $550,000
- Recognized gain: the lesser of realized gain ($550,000) or boot received ($150,000), so $150,000
- Deferred gain: $550,000 - $150,000 = $400,000
- Tax due in Year 1: $150,000 taxed at the client's marginal rate (say 20% federal plus the 3.8% net investment income tax, or NIIT, for 23.8%, about $35,700)
The client keeps $150,000 and pays tax on a $150,000 gain. The cash is real, and so is the tax that comes with it.
Borrowing instead of cashing out
Same client, same $800,000 sale and $650,000 purchase. This time, instead of keeping $150,000 in cash, they borrow it.
- Purchase price: $650,000
- New loan: $150,000 (a mortgage or home equity line of credit)
- Cash kept: $0, so boot received is $0
- Recognized gain: $0
- Deferred gain: $550,000
- Tax due in Year 1: $0
The client still has $150,000 to spend, but because it came from debt rather than kept proceeds, the exchange defers the full $550,000 gain. Maximizing deferral and borrowing for liquidity is a common planning approach.
Mortgage boot: when total debt drops
Mortgage boot appears when the client's total debt falls from the old property to the new one. Cash is beside the point here; the debt reduction itself is boot.
A debt drop that triggers gain
Client sells a property carrying $400,000 in debt for $900,000 (basis $200,000, a $700,000 gain) and buys a replacement for $875,000 with $300,000 in new debt.
Debt:
- Old debt: $400,000
- New debt: $300,000
- Net reduction: $100,000, which is mortgage boot
Boot and gain:
- Cash received beyond debt payoff: $0
- Mortgage boot: $100,000
- Total boot: $100,000
- Recognized gain: the lesser of the $700,000 realized gain or $100,000 boot, so $100,000
- Deferred gain: $600,000
No cash changed hands, but shedding $100,000 of debt is an economic benefit, and the client recognizes $100,000 of gain for it.
When more debt is not boot
Client sells for $900,000 (basis $200,000, a $700,000 gain) with $350,000 in debt, then buys a replacement for $950,000 with $500,000 in new debt.
Debt:
- Old debt: $350,000
- New debt: $500,000
- Net change: $150,000 increase, so zero mortgage boot
Boot and gain:
- Mortgage boot: $0, because debt rose rather than fell
- The extra $150,000 borrowed simply funds a more expensive property
- Recognized gain: $0, assuming no cash received
- Deferred gain: $700,000
Taking on more debt is not boot. It is just a bigger mortgage on a bigger property.
Hidden boot: the exposure advisors miss
Hidden boot is where exposure slips through unnoticed. It shows up as closing costs paid from exchange proceeds, prorations received in cash, personal property bundled into the deal, and non-qualifying improvements.
Closing costs paid from proceeds
A client's sale nets $500,000 in proceeds after debt payoff and the realtor's commission. The closing costs on the replacement property look like this:
- Title insurance: $2,000
- Lender fees (discount points, origination): $5,000
- Property inspection and appraisal: $1,500
- HOA transfer fees: $500
- Total: $9,000
The question is who pays them. If the qualified intermediary (QI) - the party that holds the exchange proceeds - pays these costs, that money is no longer available to reinvest. A client aiming to buy for $500,000 who lets $9,000 of proceeds go to closing costs has reinvested only $491,000, and the $9,000 gap is boot. If the client instead pays those costs from personal funds outside the exchange, there is no boot.
The IRS looks closely here. Form 8824 may show no cash boot while the closing statement shows costs drawn straight from the sale proceeds, and that mismatch is a red flag.
One transparent way to handle it is to have the QI pay the buyer's closing costs directly from exchange proceeds, document it, and calculate the resulting boot rather than obscure it.
Prorations received in cash
Rental exchanges are full of prorations. The seller collects rent for the days before closing; the buyer gets a credit. Property taxes, utilities, and insurance are split the same way. If your client, as seller, receives a cash proration and does not reinvest it, that cash is boot.
Say the property closes on the 20th. The seller has already collected the month's rent, so the buyer is credited for their 10 days. The QI receives a $2,000 cash proration credit for the buyer's share. If that $2,000 is not reinvested in the replacement, it is boot.
Personal property bundled into the deal
Some exchanges include personal property - furniture, equipment, vehicles - alongside the real estate. Personal property is not like-kind to real property, so any of it the client receives is boot.
A client sells an apartment building for $1,200,000, and $30,000 of that is used appliances and furniture. If the client does not buy comparable personal property in the replacement, that $30,000 is boot received. Buy equivalent personal property and it is not.
Boot minimization checklist
Run this with the QI and closing team before the replacement property closes.
1. Price comparison
2. Debt comparison
3. Closing costs on the relinquished property
Selling expenses reduce the amount available to reinvest.
4. Closing costs on the replacement property
5. Prorations and cash adjustments
6. Personal property
7. Net boot position
8. Boot offset options
A multi-boot scenario, start to finish
Client A sells a commercial property:
- Sale price: $1,000,000
- Adjusted basis: $400,000
- Outstanding mortgage: $450,000
- Realtor commission (6%): $60,000
- Closing costs (attorney, title, recording): $8,000
- Total selling expenses: $68,000
Amount realized: sale price $1,000,000 plus assumed debt $450,000 minus selling expenses $68,000 = $1,382,000. Realized gain: $1,382,000 - $400,000 = $982,000.
Replacement property:
- Purchase price: $950,000
- New mortgage: $300,000
- Cash the client adds from their own account: $50,000
- Buyer's closing costs paid from proceeds: $10,000 (title, appraisal, lender fees)
Now trace the cash. The QI receives the $1,000,000 in sale proceeds. The new mortgage is funded by the lender directly, outside the exchange, so it never touches the QI's balance. The QI pays $10,000 in closing costs and $950,000 to acquire the replacement, which leaves $40,000 sitting in the exchange - cash the client did not reinvest, and therefore cash boot. (The old $450,000 mortgage was paid off from proceeds, already accounted for in the amount realized above.)
Then mortgage boot: old debt $450,000, new debt $300,000, a $150,000 reduction.
- Cash boot: $40,000
- Mortgage boot: $150,000
- Total boot: $190,000
- Recognized gain: the lesser of the $982,000 realized gain or $190,000 boot, so $190,000
- Deferred gain: $982,000 - $190,000 = $792,000
The Year 1 tax bill: $190,000 of gain at, say, a 24% effective rate, about $45,600.
Where the boot could shrink: the client is already adding $50,000 from personal funds. Applied to the purchase, that lifts the effective purchase price to $1,000,000 (950,000 plus 50,000 in added cash), matching the sale price and erasing the cash boot. The $150,000 of mortgage boot stays, so total boot falls to $150,000 and the tax bill drops by about $9,600. Alternatively, a larger replacement at $1,000,000 with a $450,000 mortgage would match both price and debt and bring total boot to zero, assuming no cash is kept - but the client may not want a larger property.
When keeping boot is a deliberate choice
Boot is not always something to eliminate. If the client's plan is to pull out some capital, to fund retirement or diversify into other investments, paying tax now on part of the gain can be a reasonable trade.
Say a client has $1 million of real estate gains and intends to sell in five years regardless. Taking $200,000 of cash boot now, and paying about $48,000 in tax at 24%, pulls capital forward and reduces the gain that remains deferred. It is a judgment call, and a legitimate one.
The conversation to have with the client: defer the whole gain and carry more debt, or pay some tax now for liquidity?
Related worksheets and tools
For basis calculation after an exchange that involves boot, see Basis Tracking After a 1031 Exchange: Advisor Worksheet and Example. For closing-cost questions, see 1031 Closing Costs: Advisor Reference and Documentation. For the Form 8824 calculation itself, see Form 8824 Advisor Walkthrough. To model boot scenarios and compare recognized gain at different boot levels, use the 1031 Exchange Tax Savings Calculator.
Run a full boot analysis before closing: compare sale price to purchase price, compare old debt to new debt, review every closing-cost line, and confirm how prorations are handled. A small boot balance can sometimes be erased by adding cash at closing or raising the purchase price.
Frequently asked questions
Is mortgage reduction automatically considered boot?
Only the net reduction is. If the client owed $300K on the relinquished property and owes $250K on the replacement, the $50K drop is mortgage boot and triggers $50K of recognized gain. If debt instead rises (old debt $300K, new debt $350K), there is zero mortgage boot from the debt side; the extra $50K borrowed is simply a bigger loan, not something received.
Can closing costs create boot?
Yes, when they are paid from exchange proceeds or the exchange funds cover non-qualifying costs. If homeowners insurance, HOA transfer fees, or lender discount points come out of the 1031 proceeds instead of the client's separate funds, those amounts count as cash diverted from the exchange and become boot. Review the closing statement line by line to see which costs are paid from proceeds.
Can you recognize a loss in a 1031 exchange?
No. If the replacement is cheaper than the relinquished property (sale price above purchase price), the client does not recognize a loss; instead they recognize gain up to the boot received, and the loss is deferred through the carryover basis. Example: sold for $600K (basis $300K), bought for $500K, keeping $100K in cash. The client recognizes the $100K gain but cannot claim the opportunity loss.
How is boot taxed, capital gains or ordinary?
It follows the character of the gain being deferred. If that gain includes depreciation recapture (unrecaptured Section 1250 gain), the recognized gain may be taxed partly at 25% and partly at capital gains rates, which takes careful coordination between Form 8824 and Schedule D. Consult the client's CPA to pin down the exact rate on the recognized gain; it is not always the 20% long-term capital gains figure.
Can boot be offset by adding cash at closing?
Partly, yes. A client who would otherwise receive boot can add cash at the replacement closing to offset some or all of it. Example: the exchange would generate $30K of mortgage boot, but the client contributes $30K of their own funds at closing, netting to zero boot. The added cash has to come from outside the exchange proceeds, and it should be documented as coming from the client's account rather than the exchange.