Yes, you can take cash out of a 1031 exchange, but every dollar you keep instead of rolling into the replacement property is immediately taxable. The IRS calls that leftover cash “boot” and taxes it as recognized gain, stacking capital gains tax, depreciation recapture, and possibly a 3.8% surtax on top. Full deferral requires reinvesting all the sale proceeds into a replacement property worth at least as much as what you sold.
What Counts as Boot
Section 1031 lets you swap one investment property for another without recognizing gain, but only to the extent you actually receive like-kind real property in return. Any cash or non-real-property value you walk away with is boot, and it’s taxable up to the total gain you realized on the sale.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment If your realized gain was smaller than the boot amount, the tax is capped at that gain.
Boot shows up in two forms. Cash boot is the obvious one: you sell for $500,000, reinvest $450,000, and the $50,000 you kept is taxable. Mortgage boot is subtler and catches more people off guard, which is why it gets its own section below.
What You’ll Pay in Tax on the Cash
Cash taken from an exchange doesn’t get one flat rate. It runs through a stack of three or four separate taxes, and the combined bill is usually steeper than investors expect.
Capital Gains
Recognized gain gets long-term capital gains treatment if you held the property more than a year. For 2026, the rates depend on taxable income and filing status:2Internal Revenue Service. Revenue Procedure 2025-32
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly).
- 15% above those thresholds up to $545,500 (single) or $613,700 (joint).
- 20% above $545,500 (single) or $613,700 (joint).
Most investors doing 1031 exchanges land in the 15% or 20% bracket. The 0% rate rarely helps someone selling investment property at a real gain.
Depreciation Recapture
If you claimed depreciation on the property you sold, the IRS recaptures that benefit as soon as gain is recognized. The portion of your gain tied to prior depreciation is taxed at a maximum 25% rate, higher than the standard long-term capital gains rate.3Office of the Law Revision Counsel. 26 USC 1 Tax Imposed – Section 1(h) Recapture applies before the remaining gain gets taxed at the regular capital gains rate. This is one reason a modest cash withdrawal can produce a surprisingly large bill.
Net Investment Income Tax
High earners pay an extra 3.8% on net investment income, which includes recognized gain from property sales. The surtax kicks in when modified adjusted gross income tops $200,000 (single) or $250,000 (joint), and those thresholds aren’t indexed for inflation.4Office of the Law Revision Counsel. 26 USC 1411 Imposition of Tax An investor in the 20% capital gains bracket with depreciation recapture and the surtax can face a combined effective rate approaching 30% on the cash pulled out.
State Tax
Most states tax the recognized gain on their own terms. Some require withholding from non-resident sellers at closing, and a few don’t follow the federal 1031 deferral at all or attach additional conditions. Your state’s rules can add several percentage points to the federal bill.
Taking Cash Out on Purpose: The Partial Exchange
Sometimes investors want the cash and accept the tax. A partial exchange does exactly that: you buy a replacement property worth less than what you sold, defer tax on the reinvested portion, and pay tax on the gap. Sell for $1.2 million, buy for $1 million, and $200,000 gets recognized as taxable gain (capped at your total realized gain on the sale).1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
Nothing about this is against the rules. It can make sense when you want to move some equity into non-real-estate investments or pay down personal debt. The replacement still has to qualify as like-kind real property held for business or investment use, and both the recognized and deferred portions get reported on Form 8824.5Internal Revenue Service. Instructions for Form 8824 (2025) Run the numbers with your accountant before you commit, because the tax bill can eat most of the liquidity you thought you were getting.
Mortgage Boot: The Accidental Version
Most unintentional boot comes from debt, not cash. Sell a property carrying a $400,000 mortgage, buy a replacement with only a $250,000 mortgage, and the IRS treats the $150,000 in debt relief as boot, even though no cash ever touched your hands.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment You walked away from a $400,000 obligation, so you’re $150,000 richer in economic terms.
You can dodge mortgage boot by taking on equal or greater debt on the new property, but lenders have their own underwriting standards and that isn’t always possible. The workaround is adding cash out of pocket to close the gap. If you had $400,000 in debt before and $250,000 after, contributing $150,000 of your own money to the purchase offsets the debt reduction. The general rule: your total investment in the replacement property (debt plus equity) must equal or exceed what you had in the property you sold.
Closing Costs That Don’t Trigger Tax
Not every dollar leaving the exchange account creates boot. Treasury regulations let you pay certain normal and customary transaction expenses from exchange funds without penalty:6eCFR. 26 CFR 1.1031(k)-1 Treatment of Deferred Exchanges
- Real estate broker commissions.
- Title insurance and escrow fees.
- Recording fees and transfer taxes.
- Prorated property taxes.
- Qualified intermediary fees.
- Environmental inspections and surveys tied to the exchange properties.
Financing costs are different. Loan origination fees, points, mortgage insurance premiums, and lender-required appraisals are generally not treated as exchange expenses. Paying them from exchange funds can create taxable boot because the IRS views them as costs of borrowing, not costs of acquiring the property. Pay loan-related costs from a separate personal account and reserve exchange funds for the purchase price and allowable transaction costs.
When Leftover Funds Come Back to You
Timing controls when the money hits your hands. A deferred exchange runs on two hard deadlines starting the day you close on the sale, and missing either one collapses the entire exchange with no extensions.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
- Within 45 calendar days you must identify potential replacement properties in writing.
- Within 180 calendar days you must close on one of them (or by your tax return due date including extensions, whichever comes first).
If day 45 passes with no valid identification, the qualified intermediary can release the funds to you, and the full gain becomes taxable that year. Same result if day 180 passes without a closing. Any exchange funds left with the intermediary after the period ends get disbursed and taxed as recognized gain. So the practical answer to “when can I get the cash” is either at the close of the replacement purchase (if less than the full amount is reinvested) or when one of the deadlines expires.
Refinancing: The Way Most Investors Actually Pull Cash Out
If your real goal is liquidity rather than exiting the investment, refinancing is usually the better tool. Loan proceeds aren’t income, they’re borrowed money you’ll repay, so a refinance by itself doesn’t trigger tax. The trick is keeping the refinance far enough away from the exchange that the IRS doesn’t collapse them into a single transaction.
Refinancing Before the Exchange
Some investors refinance the property they’re about to sell, pull out cash, and then exchange the remaining equity. The IRS can challenge this under the step transaction doctrine: if the loan had no purpose other than extracting equity tax-free ahead of a planned sale, the agency may recharacterize the loan proceeds as boot. You need a genuine business reason for the loan that’s independent of the sale, with documentation. Refinancing six months or more before listing is far safer than refinancing two weeks before closing.
Refinancing After the Exchange
Once you own the replacement property, you can borrow against it. This usually reads as a separate transaction with its own economic substance because you’re borrowing against property you already hold. Most advisors suggest waiting six months to a year after closing on the replacement property to create clear separation. There’s no bright-line rule from the IRS, but the longer the gap, the harder it is to argue the two transactions were one plan.
Refinancing isn’t free. Closing costs on a new loan typically run 3% to 6% of the principal, and you’re adding a debt obligation with interest that changes the property’s cash flow.7Freddie Mac. Costs of Refinancing Compared with paying 25% to 30% in combined federal tax on boot, the interest cost is often the cheaper path to liquidity, especially if you plan to hold the replacement property long term.