Partial exchanges

A 1031 exchange is not all-or-nothing. You can defer most of your gain and pay tax on a slice of it, on purpose. This is a partial exchange, and it happens whenever you do not fully reinvest, when you take some cash out, buy a cheaper replacement, or reduce your debt. The part you do not roll over is taxable boot; the rest still defers. Understanding partial exchanges turns the 1031 from a rigid all-in move into a dial you can set.

What triggers a partial exchange

To defer 100% of your gain, you have to do two things: buy a replacement of equal or greater value, and carry equal or greater debt. Miss either, and you have a partial exchange, with the shortfall taxed as boot. There are two ways it happens.

Cash boot is money you pull out. Sell for $1,000,000, buy for $900,000, and take the $100,000 difference in cash, that $100,000 is cash boot, taxable. Mortgage boot, or debt relief, is subtler and catches people off guard. If your old property had a $500,000 mortgage and your replacement has only a $300,000 mortgage, that $200,000 of debt you shed is treated as if you received cash, constructive cash, and it is taxable boot even though no money changed hands. The IRS sees debt relief as an economic benefit, and it taxes it.

A partial exchange happens when you take cash out or reduce your debt, and both the cash and the debt reduction are taxable boot even though the rest of the exchange still defers.

Boot is taxable only up to your gain, recapture first

Two rules soften and shape the boot tax. First, boot is taxable only to the extent of your realized gain, so you cannot be taxed on more boot than you actually gained. Second, and this is the one that stings, recapture comes out first: the taxable boot is characterized as depreciation recapture before it is characterized as capital gain, so the first dollars of boot are often taxed at the higher recapture rates rather than the lower capital gains rate. On a heavily depreciated property, a modest amount of boot can be entirely recapture, taxed at up to 25% or, for cost-seg components, ordinary rates.

Boot is taxed only up to your total gain, but recapture is recognized first, so the initial dollars of boot are often taxed at the higher recapture rate, not the capital gains rate.

You can offset debt boot with cash

A useful mechanic: mortgage boot can be cured by adding cash. If shedding $200,000 of debt would create $200,000 of mortgage boot, you can eliminate it by putting $200,000 of your own cash into the replacement property. Cash you add offsets debt you shed. This is why an investor moving from a high-leverage property to a low-leverage one can still fully defer, by bringing cash to make up the debt gap. Cash boot, by contrast, cannot be offset the same way; money you take out is simply taxable.

When taking boot on purpose is smart

Partial exchanges are not just accidents to avoid; sometimes boot is the goal. If you need liquidity, taking cash boot and paying tax on it can beat the cost and constraint of a full exchange. If you are deliberately moving from a high-debt asset to a low-debt one, the mortgage boot is the price of that strategic shift. And here is the current planning move that ties this pillar to cost segregation: you can deliberately take boot in the exchange year and offset the resulting taxable gain with a large first-year depreciation deduction from a cost-segregation study on the replacement property, using 100% bonus depreciation. The boot and the depreciation are independent calculations in the same year, so a well-timed study can absorb the tax on intentional boot.

Taking boot can be deliberate: for liquidity, for a debt-level shift, or to be offset in the same year by bonus depreciation from a cost-segregation study on the replacement property.

The bottom line

• A partial exchange defers most of the gain and taxes the part you do not reinvest.
• Taking cash out is cash boot; reducing your debt is mortgage boot, and both are taxable.
• Boot is taxable only up to your gain, but recapture is recognized first, at higher rates.
• Mortgage boot can be offset by adding cash; cash boot cannot.
• Taking boot deliberately can be smart, especially offset by same-year bonus depreciation on the replacement.

For the boot mechanics in depth, read boot. 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.