CPA-led 1031 exchange guide
1031 Exchange Boot Explained
Boot is the part of a 1031 exchange that doesn't qualify for deferral — it's taxable in the year of the exchange. Boot can come from cash you receive, debt you paid off and didn't replace, or non-like-kind property you took as part of the deal.
Cash boot
Any sale proceeds you don't reinvest into replacement property. The simplest example: you sell for $1M, pay off a $300K mortgage, and only reinvest $500K — the remaining $200K is cash boot, taxable as gain.
Mortgage boot (debt relief)
Debt on the relinquished property that isn't matched by debt or cash on the replacement. You sell with a $400K mortgage, then buy a replacement with only $250K of debt and no new cash — the $150K of debt relief is mortgage boot.
How to avoid boot
To defer 100% of the gain: buy equal-or-up in total value, reinvest all the net equity, and replace (or offset with new cash) any debt that was paid off at the relinquished closing.
Strategic boot
Sometimes a small amount of boot is intentional — to pull cash out for renovations or to right-size debt. The CPA-led approach lets you decide knowingly, not by accident.
Frequently Asked Questions
Is boot always bad?
Not necessarily. It's just taxable. Some investors deliberately take a small amount of boot to pull cash out — they just need to know the tax cost up front.
Does paying closing costs from exchange funds create boot?
Some closing costs are exchange expenses and don't create boot; others do. Brandon reviews each closing statement to flag any items that would create unexpected boot.