Boot in a 1031 Exchange — The Part You Still Pay Tax On

TL;DR: Boot is whatever you get out of a 1031 exchange that isn't like-kind real estate — cash in hand, or debt relief if your new mortgage is smaller than your old one. That amount is taxed as gain in the year of the exchange, even though the rest of the deal defers tax under Section 1031. To avoid it, buy replacement property that's equal or greater in both price and debt.

_Last reviewed: August 2026 · 8 min read_

You did the exchange right, followed the 45-day and 180-day rules, used a qualified intermediary — and still got a tax bill. That happens when part of your exchange produces "boot," the piece the IRS won't let you defer.

Okoniq Property Hub keeps a running log of your exchange dates, replacement property basis, and any cash or debt differences, so you're not reconstructing the math from memory when your CPA asks for it.

What exactly counts as boot in a 1031 exchange?

Boot is any value you receive in the exchange that isn't like-kind real property held for investment or business use. The most common forms are cash boot and mortgage boot, but boot can also show up as personal property thrown in, or seller-financed notes you take back instead of cash.

If you sell a rental for $500,000 and buy a replacement for $450,000, the $50,000 difference doesn't disappear. Even if it's sitting in your qualified intermediary's escrow account and never touches your personal bank, the IRS treats it as boot because you didn't reinvest all of it into like-kind property. For the mechanics of how the exchange itself is supposed to work before boot enters the picture, see 1031 Exchanges — A Landlord's Introduction.

How does cash boot happen?

Cash boot happens whenever you walk away from the exchange with money instead of putting it all into the replacement property. This is the most literal form of boot and the easiest to spot on a closing statement.

It can happen on purpose — some owners deliberately take a partial cash-out and accept tax on that slice while deferring the rest — or by accident, when the replacement property simply costs less than the relinquished one and the leftover proceeds get returned to you rather than applied. Either way, the IRS doesn't care about intent. If cash lands in your hands (or even in an account you control before the intermediary uses it), it's boot.

How does mortgage (debt) boot happen?

Mortgage boot happens when the debt on your replacement property is lower than the debt you paid off on the property you sold. This one catches people off guard because no cash actually changes hands — the "relief" comes from carrying less debt.

Say you had a $200,000 mortgage on the property you sold and only take on a $150,000 mortgage on the replacement. That $50,000 reduction in liability is treated as if the IRS handed you cash, even though it didn't. This is why the rule of thumb for a fully tax-deferred exchange is to buy property that's equal or greater in both purchase price and loan amount. Paying cash to make up the gap on the new property doesn't offset mortgage boot — the two are calculated separately and then added together.

| Type | What triggers it | Example | |---|---|---| | Cash boot | Proceeds not reinvested into replacement property | Sale nets $500,000, replacement costs $450,000 — $50,000 is boot | | Mortgage boot | New loan balance is smaller than old loan balance | Old mortgage $200,000, new mortgage $150,000 — $50,000 is boot |

How is boot actually taxed?

Boot is taxed as gain in the year of the exchange, up to the amount of your realized gain — it doesn't create a loss, and it isn't taxed beyond the gain you'd have owed on a straight sale. The character of that gain still matters. Some of it may be ordinary income if it corresponds to depreciation you've claimed, and some may be capital gain.

This is where depreciation recapture gets tangled up with boot. If part of the boot represents depreciation you've already deducted on the relinquished property, that portion is recaptured and taxed accordingly rather than treated purely as capital gain. The exact recapture rate for real property depends on your situation — confirm the current figure with your CPA or on IRS.gov rather than assuming a number, since this is a detail worth getting right before you file. For the full mechanics of how recapture is calculated at sale, see Depreciation Recapture — What Happens When You Sell.

Because boot is taxed in the year the exchange closes, it can also affect your quarterly estimated payments if the amount is large enough to move you into an underpayment position. If you're not sure whether a boot event changes what you owe for the current quarter, Quarterly Estimated Tax Payments for Rental Income walks through how to recalculate.

Can you avoid boot entirely?

Yes, by matching or exceeding both the price and the debt on the replacement property. The two most common ways owners accidentally create boot are buying a cheaper replacement and pocketing the difference, or paying off more debt than they replace.

To stay fully deferred: reinvest all net proceeds from the sale, and take on new debt equal to or greater than what you paid off. If you want to pull some equity out, you can — just go in knowing the amount you keep is boot and will be taxed that year, not deferred to some future sale. Some owners plan for this deliberately, treating the boot as a calculated partial cash-out rather than a surprise on their return.

What about the basis of the replacement property?

Your basis in the new property isn't simply what you paid for it — it carries over adjustments from the relinquished property, reduced or increased by boot received or paid. This is the piece that trips people up months later when they try to calculate depreciation on the new property, or years later when they sell it and need to know the correct starting basis. If you've ever had to work backward through a property's basis history, the process is similar to what's covered in How to Calculate Cost Basis on an Inherited House, just with exchange adjustments layered in instead of a step-up.

Get the basis wrong at the time of the exchange and every depreciation deduction and future gain calculation on that property inherits the error. It's worth having your CPA confirm the final basis number in writing before you start depreciating the replacement property.

FAQ

Is boot always taxed at capital gains rates?

Not necessarily. Boot is taxed up to your realized gain, and the portion tied to depreciation recapture may be taxed differently than the portion that's pure capital gain — confirm the applicable rates with your CPA for your specific situation.

Does taking cash out at closing always create boot?

Yes, if that cash comes from the exchange proceeds rather than from a separate source. Cash you receive from the sale that isn't reinvested into the replacement property is boot, regardless of how the closing statement labels it.

Can I offset mortgage boot by adding cash to the deal?

No. Cash boot and mortgage boot are calculated as separate categories and then combined — paying extra cash into the replacement property doesn't cancel out a smaller new mortgage balance.

What if my replacement property is worth more but I take on less debt?

You can still create mortgage boot even if the total price is higher, if the debt portion specifically is lower than what you paid off. Debt relief is measured on its own, independent of the total purchase price.

Does the qualified intermediary holding the funds prevent boot?

No. Using a qualified intermediary is required to defer tax on the exchange, but it doesn't change whether boot exists. If the funds the intermediary holds ultimately aren't applied to like-kind replacement property, that portion is still boot.

<div class="glass rounded-2xl p-5 mt-7 max-w-4xl border border-red-400/30 bg-red-500/5"> <div class="flex items-start gap-3"> <span class="text-2xl flex-shrink-0">⚠️</span> <div class="flex-1 min-w-0"> <p class="text-red-200 text-sm font-bold">Not tax advice</p> <p class="text-slate-300 text-xs mt-1 leading-relaxed"> This post explains the general mechanics of boot in a 1031 exchange using illustrative example numbers, not your actual figures. It does not account for your specific tax bracket, state rules, entity structure, depreciation history, or legislation after July 2026. Tax rules change and depend on your specific situation. Talk to a licensed CPA before acting on anything here, and confirm current figures on IRS.gov. </p> </div> </div> </div>