Boot explained

Boot is the most important word in 1031 exchanges that nobody explains clearly. It is simply anything you receive in the exchange that is not like-kind real property, and it is the part that gets taxed. A perfectly structured exchange has zero boot and zero tax. A sloppy one has boot the investor never saw coming and a tax bill to match. Master boot and you can dial your exchange’s tax outcome precisely; ignore it and the exchange surprises you.

The two kinds of boot

Boot comes in two main forms, and the second one is the one that ambushes people.

Cash boot is straightforward: any sale proceeds you receive rather than reinvest. Take money off the table, and that money is boot. Leftover exchange funds the qualified intermediary hands back at the end because you bought something cheaper are cash boot too.

Mortgage boot, or debt relief, is the sneaky one. If the debt on your replacement property is less than the debt on your old property, the difference is treated as if you received cash. Pay off a $500,000 mortgage and take on only a $300,000 one, and the IRS treats that $200,000 of shed debt as constructive cash received, taxable, even though no money ever touched your hands. Investors who trade down in leverage get a tax bill for money they never saw. There is also personal property boot: if non-real-estate items (furniture, equipment) come with the deal, their value is boot.

Boot is anything received that is not like-kind real estate, in two main forms: cash you take out, and debt relief from carrying a smaller mortgage, which is taxed as if it were cash.

How boot is taxed

Two rules govern the tax. Boot is taxable only to the extent of your realized gain, so you can never be taxed on more boot than you actually made on the property. And the character of the boot follows an order: depreciation recapture is recognized first, then capital gain. This matters because recapture is taxed at a higher rate, up to 25% for the building and ordinary rates for cost-seg components, than the capital gains rate. So the first dollars of boot on a depreciated property are often taxed at the higher recapture rate, not the friendlier capital gains rate.

Boot is taxed only up to your realized gain, and recapture is recognized before capital gain, so the first boot dollars are frequently taxed at the higher recapture rate.

The netting rule that saves exchanges: cash offsets debt

Here is the mechanic that lets careful investors zero out boot they would otherwise owe. Mortgage boot can be offset by adding cash. If trading down in debt would create $200,000 of mortgage boot, you can eliminate it by bringing $200,000 of your own cash into the replacement purchase. Cash you add cancels debt you shed.

The offset runs one direction only. Adding cash cures mortgage boot, but you cannot use extra debt to offset cash you pulled out, cash boot you take is simply taxable. And the netting has rules: cash boot received and mortgage boot are netted in a specific way, and the general planning goal, if you want zero tax, is to buy equal or greater in value, use all your equity, and carry equal or greater debt. Fall short on debt, make it up with cash.

Mortgage boot can be canceled by adding cash to the purchase, but cash you take out cannot be offset by taking on more debt, so the cure runs one way.

Boot as a deliberate tool

Boot is not only a mistake to avoid. Taken on purpose, it is a control dial. Need liquidity from the sale? Take cash boot and accept the tax on it while deferring the rest. Moving from a high-leverage asset to a low-leverage one? The mortgage boot is the price of that shift. And the current planning move worth knowing: you can deliberately create boot and offset the resulting tax in the same year with a large bonus-depreciation deduction from a cost-segregation study on the replacement property. The boot gain and the depreciation deduction are separate calculations landing in the same year, so a study can absorb the tax on intentional boot. That is how a partial exchange becomes a precision tool rather than a leak.

The bottom line

• Boot is anything received in an exchange that is not like-kind real estate.
• Cash boot is money you take out; mortgage boot is debt relief taxed as if it were cash.
• Boot is taxable only up to your gain, and recapture is taxed first, at higher rates.
• Adding cash cures mortgage boot, but taking on debt cannot cure cash boot.
• Boot can be taken deliberately and offset in the same year by bonus depreciation on the replacement.

For deliberate boot strategy, read partial exchanges. For the depreciation offset, see what is cost segregation. For the full picture, start at the 1031 exchanges and exit planning hub.

Last verified August 2026.