1031 Exchange Boot Explained: Cash Boot, Mortgage Boot, and Hidden Boot
16 min read · The Basics · Last updated
Reviewed by
Key Takeaways
Boot is any cash or non-like-kind property you receive in a 1031 exchange. It triggers capital gains tax on the lesser of the gain recognized or the boot received. The three types are cash boot (taking cash out), mortgage boot (taking on less debt), and hidden boot (prorations, personal property, certain fees). Even small amounts of boot create tax liability.
Boot is the portion of a 1031 exchange that is not like-kind real property. Any boot you receive triggers capital gains tax. Understanding what creates boot and how to avoid it is essential to preserving full deferral.
The recognized-gain formula
The tax you owe on boot is straightforward:
Recognized gain = the lesser of (a) total realized gain or (b) total boot received
If you have a $200,000 realized gain and receive $50,000 in boot, you recognize $50,000 in gain. If you have a $30,000 realized gain and receive $50,000 in boot, you recognize only $30,000 because your gain caps the amount.
Three types of boot
| Type | What triggers it | How to avoid it |
|---|---|---|
| Cash boot | Exchange proceeds exceed the cost of your replacement property, and the excess cash comes back to you | Acquire replacement property with a value equal to or greater than your net sale price |
| Mortgage boot | Your new mortgage is smaller than your old mortgage, so your debt decreases | Replace debt dollar-for-dollar, or add personal cash to offset the reduction |
| Non-like-kind property boot | Part of the transaction involves personal property (furniture, equipment, appliances) that does not qualify as real property under Section 1031 | Separate personal-property allocations from the exchange and pay for them outside of exchange funds |
Cash boot
Cash boot is the simplest form. It arises when your QI has leftover funds after purchasing the replacement property.
Example: You sell for $500,000, and your QI receives $500,000 in net proceeds. You buy a replacement property for $460,000. The remaining $40,000 comes back to you as cash. That $40,000 is boot, and you owe capital gains tax on up to $40,000 of your realized gain.
Mortgage boot
Mortgage boot occurs when the debt on your replacement property is less than the debt on the property you sold. The IRS treats a reduction in debt the same as receiving cash.
Mortgage boot = old mortgage - new mortgage (if positive; if negative, there is no mortgage boot)
Example: You sell a property with a $300,000 mortgage. You buy a replacement with a $150,000 mortgage. The $150,000 debt reduction is mortgage boot.
Mortgage boot and cash boot are additive. If you also have $50,000 in leftover cash, your total boot is $200,000.
Non-like-kind property boot (hidden boot)
Several items can create boot that is less obvious on the settlement statement:
Personal-property allocations. If the settlement statement allocates part of the purchase price to appliances, furniture, or equipment, that portion does not count as like-kind real property. A $400,000 acquisition with a $20,000 personal-property allocation gives you only $380,000 in qualifying replacement value.
Certain closing costs paid from exchange funds. Costs that acquire or title the property (title insurance, recording fees, escrow fees) are generally acceptable. Costs that are financing expenses (loan origination fees, discount points, lender reserves) or personal expenses (inspections, appraisals you pay for) reduce the funds applied to the property and can create boot. See the closing costs guide for a detailed breakdown.
Prorations at closing. If your QI pays prorated property taxes, insurance, or HOA fees from exchange funds, those amounts reduce the funds applied to the purchase price, potentially creating boot. Pay prorations from personal funds to avoid this.
Worked examples
Example 1: trade up, full deferral
| Item | Amount |
|---|---|
| Sale price | $600,000 |
| Old mortgage payoff | $200,000 |
| Selling costs (commission, closing) | $36,000 |
| Net proceeds to QI | $364,000 |
| Replacement purchase price | $650,000 |
| New mortgage | $286,000 |
| Cash from QI needed at closing | $364,000 |
| Cash boot | $0 (all proceeds used) |
| Mortgage boot | $0 (new debt exceeds old debt) |
| Total boot | $0 |
| Recognized gain | $0 |
Example 2: trade down, partial boot
| Item | Amount |
|---|---|
| Sale price | $600,000 |
| Old mortgage payoff | $200,000 |
| Selling costs | $36,000 |
| Net proceeds to QI | $364,000 |
| Replacement purchase price | $450,000 |
| New mortgage | $100,000 |
| Cash from QI needed at closing | $350,000 |
| Leftover cash returned to investor | $14,000 |
| Cash boot | $14,000 |
| Mortgage boot | $100,000 ($200K old - $100K new) |
| Total boot | $114,000 |
| Realized gain on sale | $250,000 |
| Recognized gain | $114,000 (lesser of boot or gain) |
At a combined 25% federal rate (capital gains + depreciation recapture blend), the tax on $114,000 of recognized gain is approximately $28,500.
Example 3: trade even, eliminate boot with personal cash
| Item | Amount |
|---|---|
| Sale price | $600,000 |
| Old mortgage payoff | $200,000 |
| Selling costs | $36,000 |
| Net proceeds to QI | $364,000 |
| Replacement purchase price | $600,000 |
| New mortgage | $200,000 |
| Cash needed at closing | $400,000 |
| Exchange funds applied | $364,000 |
| Personal cash added | $36,000 |
| Cash boot | $0 |
| Mortgage boot | $0 |
| Total boot | $0 |
| Recognized gain | $0 |
By adding $36,000 of personal cash the investor matches the sale price and debt, eliminating all boot.
Boot-avoidance strategies
1. Equal or greater value. Acquire replacement property with a total cost at least equal to the net sale price of the relinquished property. This eliminates cash boot.
2. Replace debt dollar-for-dollar. Match or exceed the old mortgage with the new mortgage. This eliminates mortgage boot. If you prefer less leverage, bring personal cash to offset the debt reduction.
3. Acquire multiple properties. If you cannot find a single property at the required value, buying two or more properties that total the target works equally well. Identify them within the 3-Property Rule or 200% Rule.
4. Add personal cash at closing. Personal funds contributed to the replacement purchase are not boot. They increase the acquisition price credited to the exchange.
5. Review settlement statements before closing. Walk through every line item with your QI and CPA. Confirm which costs will be paid from exchange funds and which from personal funds. Pay financing expenses and prorations from personal funds to avoid hidden boot.
Use the calculator for your situation
Boot calculations are specific to your numbers. Before committing to a 1031 exchange, run the calculator with your exact sale price, mortgage balance, planned replacement price, and expected closing costs. The results will show your precise boot exposure and recognized gain.
The Bottom Line
The goal of a 1031 exchange is zero boot: acquire replacement property of equal or greater value and replace your debt dollar-for-dollar or with more debt. Any deviation creates boot and triggers capital gains tax. Use our calculator to work through your specific numbers before you commit to the exchange.
Frequently Asked Questions
Related Articles
1031 Exchange for Beginners: A Plain-English Starting Point
If you sell a rental or investment property at a profit, the IRS lets you skip the tax bill - as long as you reinvest the proceeds into another property of equal or greater value within a set timeframe.
1031 Exchange Examples: 6 Real-World Scenarios
**The investor:** Maria, a W-2 employee in Colorado, bought a single-family rental in Denver for $300,000 eight years ago. It's now worth $480,000. She wants to scale up to a duplex for more cash flow.
1031 Exchange Depreciation Recapture Explained
When you own a rental or investment property, the IRS lets you deduct a portion of the building's cost each year as depreciation. For residential rental property, you spread the cost over 27.5 years. For commercial property, 39 years. These deductions reduce your taxable rental income every year...