Rules & deadlines
What is boot in a 1031 exchange?
Boot is any value from your sale that you do not reinvest into the replacement property. It is not a penalty and it does not void your exchange, but boot is taxable up to the amount of your gain. Understanding it is how you avoid a surprise tax bill.
Cash boot
If you pull cash out, for example by buying a cheaper property or not reinvesting all your net proceeds, that cash is boot and is taxed. To defer 100% of your gain, you generally need to reinvest all of your net proceeds and buy a property of equal or greater value.
Mortgage boot
If the debt on your new property is less than the debt you paid off on the old one, and you do not make up the difference with cash, that reduction is mortgage boot and is also taxable. You can offset it by taking on equal-or-greater new debt or adding equivalent cash.
How to avoid boot
To fully defer, follow the equal-or-up rule:
- Buy replacement property of equal or greater value than what you sold.
- Reinvest all of your net proceeds (equity).
- Replace any debt that was paid off, with new debt or added cash.
Is a partial exchange worth it?
Yes, often. Receiving some boot does not disqualify the exchange; it just makes it a partial deferral. You defer tax on the portion you reinvest and pay tax only on the boot. Whether that is worthwhile depends on your numbers and your broader plan, which is a good question for your CPA.
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Frequently asked questions
- Does taking boot void my 1031 exchange?
- No. Boot is taxable up to your realized gain, but the rest of the exchange still defers tax. It becomes a partial exchange with partial deferral.
- How do I avoid paying any tax?
- Buy equal or greater value, reinvest all your net proceeds, and replace any debt you paid off. Fall short on value, equity, or debt and the shortfall becomes taxable boot.
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Educational information only, not tax, legal, or investment advice. 1031 rules and deadlines are strict and can change, so confirm with the IRS and your own CPA or attorney before acting. How we source content.