What Is Boot, and Why Is It Eating My 1031?
Most partially taxable exchanges were not designed that way; someone just did not run the two-sided match. Here is the whole boot system on one page.
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Written by Bryan Martin, CPA, Managing Partner and Founder of Taxstra. Last updated August 19, 2026.
The short answer
Boot is everything you walk away with that is not like-kind real estate: cash kept, debt relieved and not replaced, or value traded down. It does not kill the exchange; it makes gain taxable dollar-for-dollar up to the boot received, and the taxed dollars carry the ugliest character first, depreciation-flavored gain before capital gain. The avoidance rule fits in one sentence: buy equal or greater value, reinvest every dollar of equity, and replace every dollar of debt (or substitute fresh cash for it). Everything else on this page is arithmetic and exceptions.
The two-sided match, worked
Sell at $500K ($300K loan), replace at $460K ($270K loan): where is the boot? (illustrative)
- Value traded down: $500K sold vs $460K bought
- $40,000 shortfall
- Equity: $200K out of the sale, $190K into the purchase
- $10,000 cash boot
- Debt: $300K relieved vs $270K assumed
- $30,000 mortgage boot
- Netting: new cash invested can offset debt relief; new debt cannot offset cash taken
- here, nothing offsets
- Total boot recognized (up to realized gain)
- $40,000 taxable
- Character: property had $120K of prior depreciation
- the $40K is taxed at recapture-flavored rates first
A $40K trade-down produced a $40K taxable event at the worst available rates, inside an exchange the taxpayer believed was fully deferred. The fix at purchase time was simple: add $40K of value, via cash or a slightly larger replacement. At filing time there is no fix, only Form 8824 arithmetic.
Note the asymmetry in the netting rules, because it is where DIY exchanges go wrong: putting additional cash into the replacement offsets debt relief, but taking on extra debt does not offset cash you pulled out. You cannot borrow your way out of cash boot; you can pay your way out of mortgage boot.
The boot sources people do not see coming
| Sneaky source | Why it is boot | The fix |
|---|---|---|
| Trading down "just a little" on price | Value shortfall is cash or debt not replaced | Match value; a DST slice can top up the difference |
| Closing credits and prorations paid from proceeds | Certain non-exchange expenses paid from exchange funds count as cash received | Pay non-qualifying items from outside funds |
| Seller carryback note to your buyer | An installment note is not like-kind property | Structure the note outside the exchange or plan for its tax |
| Lower leverage on the replacement | Debt relief unreplaced | Add cash equal to the debt step-down |
| Personal property lumped into the deal | Non-realty consideration | Carve it out and price it separately |
Boot is priced at your worst rates
Where all of this lands at filing time is Form 8824, and reading it demystifies the whole subject. The form walks from realized gain (what you would have recognized in a plain sale) to recognized gain (the lesser of realized gain or boot received) and then computes the replacement property's basis, which is where deferral actually lives: your new basis equals the replacement's cost reduced by the gain you deferred. That reduced basis is the honest price of a 1031, smaller future depreciation and a bigger embedded gain waiting at the final taxable sale. Investors sometimes discover this years later as a "low basis surprise"; it was on the 8824 all along.
The reduced-basis mechanics also explain a planning asymmetry worth knowing: boot recognized today is taxed at today's worst layers, while deferral parks gain at basis where it may eventually meet a step-up at death or another decade of exchanges. That is why the default advice is always to cure boot when curable, and why deliberately taking cash out of an exchange should be a priced decision, made against the recapture-first rates, rather than an accident of a slightly cheaper replacement.
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Frequently Asked Questions
What is boot in a 1031 exchange?
Anything of value you receive in the exchange that is not like-kind real estate: leftover cash, a reduction in your debt load that is not replaced, seller financing you carry back, or non-realty property thrown into the deal. Boot does not disqualify the exchange; it makes the exchange partially taxable, with gain recognized up to the amount of boot received.
What is mortgage boot?
Debt relief you did not replace. If the property you sold carried a $300,000 loan and your replacement carries only $220,000 of debt, you have been relieved of $80,000, and that relief is treated like receiving cash unless you offset it by adding your own cash to the purchase. Trading down in debt is the most common accidental boot.
Is buying a cheaper replacement property automatically boot?
Effectively yes. Trading down in total value means some combination of cash kept and debt not replaced, and that difference is taxable up to your realized gain. The exchange still defers the rest. If the replacement is meaningfully cheaper, model whether the partial deferral still justifies the exchange costs at all.
How is boot taxed: capital gain or recapture rates?
Recognized gain keeps its character. To the extent your gain includes depreciation, recognized amounts are taxed under those less favorable rules first (unrecaptured Section 1250 gain at up to 25%, ordinary rates on Section 1245 components), with the remainder at capital gain rates. Boot on a heavily depreciated property is more expensive per dollar than people expect.
Can I take some cash out of a 1031 on purpose?
Yes, deliberately receiving boot is a legitimate partial-cash-out: you pay tax on what you take and defer the rest. The clean way is to size it at the exchange, documented through the QI. The messy ways, refinancing immediately before the sale or grabbing cash mid-exchange, draw step-transaction scrutiny and can contaminate more than you took.
Are closing costs paid from exchange funds boot?
Standard transactional expenses of the exchange (commissions, title, escrow, QI fees) generally reduce the amount you must reinvest without creating boot. Non-exchange items paid from proceeds, prorated rents, security deposits transferred, certain loan costs, can count as cash received. The settlement statements deserve a line-by-line read before closing, because the fix (paying those items from outside funds) only works in advance.
I put my own earnest money into the replacement. Does that help?
Yes: fresh cash you invest in the replacement counts on the good side of the netting, offsetting debt relief dollar for dollar. It is reimbursable from exchange funds at closing if structured properly, or it can stay in the deal as the cash that cures a debt step-down. Either way, document it through the closing statements so the Form 8824 math can see it.
Can boot be fixed after the exchange closes?
No. Boot is measured by what actually happened at the closings: value acquired, cash received, debt replaced. There is no post-closing election, contribution, or amendment that retroactively converts received boot into deferral. That finality is why the match sheet belongs at the front of the transaction, not in the tax file afterward.
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This page is educational, not individualized tax advice. Outcomes depend on your specific facts and documentation. Savings vary by client and results are not typical of every situation. Consult a qualified tax professional before acting on anything here.