What Is Boot in a 1031 Exchange? (2026 Guide)

Boot is the term for anything you receive in a 1031 exchange that is not like-kind property. Receiving boot does not disqualify the exchange, but it triggers recognition of gain up to the amount of boot received.

There are two kinds, and investors routinely avoid one while walking directly into the other.

Cash Boot

Cash boot is the straightforward version. Any exchange proceeds you actually or constructively receive, rather than reinvesting into replacement property, is boot.

Under IRC Sec. 1031(b), gain is recognized to the extent of money and other property received, limited to the realized gain.

An investor who sells for $1,400,000 and buys replacement property for $1,250,000 has $150,000 of cash boot and recognizes $150,000 of gain, assuming realized gain is at least that much.

Constructive receipt counts. Proceeds held by an agent you control, or funds you could have accessed, are received even if you did not touch them. This is why a qualified intermediary is essential and why the exchange agreement restricts your access.

Cash used to pay non-transactional expenses at closing is also boot. Prorated rents, security deposits transferred, and repairs credited to the buyer are generally not exchange expenses, and paying them from exchange proceeds creates boot. Transactional expenses like broker commissions, title fees, and recording fees generally do not.

Mortgage Boot Is the One That Surprises People

Mortgage boot, also called debt relief, arises when the debt on the relinquished property exceeds the debt on the replacement property. Under Treasury Regulation Sec. 1.1031(d)-2, relief from a liability is treated as money received.

An investor who sells a property with $800,000 of debt and buys one with $600,000 of debt has $200,000 of mortgage boot, even if every dollar of cash proceeds was reinvested.

This catches investors who focus entirely on the equity and ignore the debt. Reinvesting all the cash is necessary but not sufficient.

Mortgage boot can be offset by adding cash to the replacement purchase. An investor with $200,000 of debt relief who contributes $200,000 of outside cash to the replacement acquisition eliminates the boot.

Cash boot cannot be offset by taking on additional debt. The rules are asymmetric: additional cash cures debt relief, but additional debt does not cure cash received. This asymmetry is the single most useful thing to understand about boot.

The Two Rules That Prevent Boot

Rule one: the replacement property must cost at least as much as the relinquished property's net selling price.

Rule two: all net equity from the sale must be reinvested, and the debt on the replacement must be equal to or greater than the debt on the relinquished property, or the shortfall made up with outside cash.

Investors who satisfy both rules have a fully deferred exchange. Investors who satisfy the first but not the second frequently have mortgage boot they did not anticipate.

Trading up in value and up in debt is the safe pattern. Trading up in value while paying down debt requires outside cash equal to the debt reduction.

Personal Property and Non-Like-Kind Components

Since 2017, IRC Sec. 1031 applies only to real property. Personal property received in an exchange is boot.

This matters for property types with substantial personal property. Acquiring a furnished short-term rental, a hotel, or a senior living community means part of the purchase price is furniture, fixtures, and equipment, which is not like-kind to the real property relinquished.

The practical answer is to allocate and structure deliberately. Purchase the personal property separately with non-exchange funds, or accept the boot and plan for the tax. Where the personal property is substantial, a cost segregation study on the replacement can generate offsetting depreciation.

Note the interaction: personal property acquired outside the exchange has a full cost basis and is bonus eligible under IRC Sec. 168(k), while the real property carries over basis from the relinquished property.

How Boot Is Taxed

Recognized gain retains its character. Boot does not create a special category.

Gain recognized is allocated first to depreciation recapture. Sec. 1245 recapture from a prior cost segregation study is ordinary income and comes out first. Unrecaptured Sec. 1250 gain at up to 25% comes next. Long-term capital gain at preferential rates comes last.

That ordering means a small amount of boot can produce a disproportionately expensive result for an investor with heavy Sec. 1245 property. An investor with $340,000 of Sec. 1245 recapture who takes $60,000 of boot recognizes that $60,000 entirely as ordinary income at up to 37%, not at capital gain rates.

This is a strong argument for eliminating boot entirely rather than accepting a small amount as immaterial.

Worked Example: Debt Relief Caught in Time

An investor sells an apartment building for $2,400,000 with $1,350,000 of debt and $980,000 of adjusted basis, producing $1,420,000 of realized gain including $215,000 of Sec. 1245 recapture from a prior study.

Selling costs are $144,000, so net proceeds after paying off debt are $906,000.

The intended replacement is a $2,450,000 property with $1,100,000 of debt. Equity required is $1,350,000, but only $906,000 of exchange proceeds are available, so the investor plans to add $444,000 of outside cash.

The value test passes: $2,450,000 exceeds the $2,256,000 net selling price. All equity is reinvested.

But debt drops from $1,350,000 to $1,100,000, creating $250,000 of mortgage boot. The $444,000 of outside cash contributed to the acquisition offsets it entirely, because cash added cures debt relief.

Had the investor instead financed $1,350,000 on the replacement and contributed only $194,000 of cash, the outcome would also have been fully deferred. Either path works. Contributing $194,000 of cash while financing only $1,100,000 would have produced $250,000 of boot, of which $215,000 would have been taxed as ordinary recapture.

Frequently Asked Questions

What is boot in a 1031 exchange?

Anything you receive that is not like-kind property. Cash boot is exchange proceeds you receive rather than reinvest. Mortgage boot is debt relief where the replacement property carries less debt than the relinquished property. Both trigger gain recognition under IRC Sec. 1031(b).

Can I offset mortgage boot with new debt?

You can avoid it by taking on at least as much debt on the replacement, or by contributing outside cash equal to the shortfall. The asymmetry matters: cash cures debt relief, but taking on more debt does not cure cash you actually received.

Are closing costs boot?

Transactional expenses like broker commissions, title fees, and recording fees generally are not. Non-transactional items paid from exchange proceeds, such as prorated rents, security deposits, and repair credits to the buyer, generally are boot.

Is furniture in a replacement property boot?

Yes. Since 2017, IRC Sec. 1031 applies only to real property, so personal property received is boot. For furnished short-term rentals, hotels, or senior living, allocate and purchase the personal property separately with non-exchange funds where possible.

How is boot taxed?

Recognized gain comes out in order: Sec. 1245 recapture as ordinary income first, then unrecaptured Sec. 1250 gain at up to 25%, then long-term capital gain. An investor with heavy Sec. 1245 property from a prior study pays ordinary rates on even a small amount of boot.

What Is Boot in a 1031 Exchange and How Do You Avoid It?