1031 boot: cash and mortgage boot explained

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Boot is anything you receive in a 1031 exchange that isn't like-kind real property: cash, debt relief or other property. It is taxed up to the amount of your realized gain, with depreciation recapture first. Avoid it by buying equal or greater value, reinvesting all net cash and replacing paid-off debt with new debt or added cash.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

In 1031 land, "boot" is not footwear. It's the part of your exchange the IRS gets to tax right now. The term comes from old horse-trading slang: the horse plus something "to boot." Section 1031(b) says that if you receive like-kind property plus money or other property, gain is recognized, but not more than the money and fair market value of other property received. Your tenant pays the mortgage; the IRS pays for the roof (eventually). Boot is where it collects a little early.

Background: 1031 exchange basics.

CPA Warning Label: Paying off a loan and buying with less debt creates taxable boot even if you never touch a dollar. Plan debt replacement before closing.

Cash boot

Cash boot is any money you receive, or are treated as receiving, in the exchange:

• Net proceeds you take out at closing or that the QI releases to you because you didn't spend them.
• Sale proceeds used to pay non-transaction costs at closing: security deposit transfers, prorated rents, property tax prorations or repairs credited to the buyer can create boot depending on how they are handled.
• Paying off a personal loan or a loan not secured by the relinquished property out of exchange proceeds.

Transaction costs such as broker commissions, title fees, escrow fees and QI fees generally reduce the amount realized (and offset boot) rather than creating it. Form 8824 instructions treat exchange expenses as reducing the cash received.

Other non-like-kind property, such as furniture, equipment or a car thrown into the deal, is also boot, at its fair market value. Since 2018, personal property is never like-kind.

Mortgage boot and debt replacement

If debt on your relinquished property is paid off or assumed by the buyer, that liability relief is treated as money received (Treas. Reg. 1.1031(d)-2). If you don't take on equal or greater debt on the replacement property, or add equivalent new cash, the net debt relief is "mortgage boot" (also called debt boot or liability relief).

Example: you sell with a $300,000 mortgage paid off at closing and buy replacement property with a $200,000 mortgage and no extra cash. That $100,000 of net debt relief is boot, even though no cash hit your pocket. People find this unfair. The IRS finds it arithmetic: you used to owe $300,000; you now owe $200,000, so your net worth in that deal grew by $100,000 without reinvestment.

Netting rules

The regulations net the two kinds of boot, but only in one direction:

• Debt assumed (new loan) offsets debt relieved. Taking on a new mortgage at least as large as the one paid off eliminates mortgage boot.
• Cash you add offsets debt relief. Bringing new money to the replacement closing offsets mortgage boot dollar for dollar.
• New debt does NOT offset cash boot received. If you pocket $50,000 at the sale closing, taking a bigger loan on the replacement property won't cure it.

Scenario D trips people up: the extra debt can't launder the cash.

How boot is taxed

Recognized gain is the lesser of realized gain or net boot received. It isn't extra tax on top of the gain. If you have $400,000 of realized gain and $50,000 of boot, you recognize $50,000; $350,000 is deferred.

Character follows the property. Recognized gain is first depreciation recapture: section 1245 recapture (ordinary) for personal property or cost-seg components, and unrecaptured section 1250 gain (up to 25%) for building depreciation, then long-term capital gain. The 3.8% NIIT may apply. Losses are never recognized in a 1031 exchange, even with boot.

Boot also adjusts basis. The replacement property's basis equals the relinquished property's adjusted basis, plus gain recognized, plus additional cash paid and new debt, minus boot received. Form 8824, Part III, does this math for you.

Boot examples

Illustration 1 (made-up numbers): Frugal Fran sells a rental for $800,000 with $300,000 adjusted basis and a $250,000 loan, paying $40,000 in closing costs. Realized gain: $800,000 − $40,000 − $300,000 = $460,000. She buys a $760,000 replacement with a $250,000 loan and keeps $0 cash. Net equity of $510,000 is fully reinvested and debt is replaced. Boot: $0. Basis in new property: $300,000 adjusted basis + $0 recognized gain + (new debt and cash paid in excess) = $760,000 − $460,000 deferred gain = $300,000.

Illustration 2: Same sale, but Fran buys a $650,000 replacement. She reinvests the $510,000 net cash and takes a $140,000 loan. Debt relieved $250,000, debt assumed $140,000: $110,000 mortgage boot. Recognized gain $110,000, taxed first as unrecaptured 1250 gain to the extent of prior depreciation. Deferred gain $350,000. Basis: $650,000 − $350,000 = $300,000.

Illustration 3: Lavish Larry buys a bigger property but takes $30,000 of cash at the sale closing for a boat. Cash boot of $30,000 is taxable even though his new loan is larger. The boat has no idea.

Estimate alternatives with the 1031 vs sell calculator.

Sneaky sources of boot

Boot doesn't always look like money. Watch for these at closing:

• Seller credits used for non-property items. A credit for repairs you didn't do reduces your price, which is fine; a credit that pays off your personal credit card is boot.
• Security deposits. When you sell, tenants' deposits often move to the buyer as a credit against the price. Depending on the settlement statement, that can be treated as cash used for a liability, and practitioners differ on handling. Reviewing the settlement statement with your QI before closing avoids surprises.
• Loan fees on the new mortgage. Financing costs are not exchange expenses; they relate to the loan. Paying them from exchange funds can create boot.
• Earnest money refunds. If an earnest deposit made from exchange funds is refunded to you rather than the QI, that is cash received.
• Seller financing. A note you receive from the buyer is boot unless the QI holds it and it is converted or sold for replacement property within the exchange period.

Reporting boot

Form 8824, Part III, computes recognized gain from net boot. The recognized gain then flows to Form 4797 (for business or rental property), where depreciation recapture and section 1231 gain are split out. If you received the boot in a later year than the sale (for example, leftover cash released by the QI in January), installment reporting may let you recognize it in the year received if the exchange was in good faith (Treas. Reg. 1.1031(k)-1(j)(2)).

Planning to avoid boot

• Trade up or equal in both value and debt (or debt plus added cash).
• Leave all proceeds with the QI. If you need cash, consider refinancing the replacement property after the exchange closes. A refinance isn't income, though doing it immediately before or after the exchange as part of a plan can be recharacterized; separation in time and purpose helps. See cash-out refinance taxes.
• Pay non-transaction items outside escrow. Security deposits and rent prorations credited to the buyer can create boot; some exchangers bring cash to closing to cover them.
• Handle furniture separately. Sell personal property in a separate taxable sale with a fair allocation.
• Accept some boot on purpose. Sometimes taking a little boot to fund a down payment elsewhere is fine if the recognized gain lands in a low bracket year. A partial exchange still defers most of the gain.