Boot in a 1031 exchange is the part of the deal that doesn’t qualify for tax deferral: cash you pocket, debt that gets reduced, or anything received that isn’t like-kind real property. Under IRC Section 1031, you can swap one investment or business property for another of like kind without owing tax on the gain, but only on the value that stays inside the exchange as qualifying real estate.1Office of the Law Revision Counsel. 26 USC 1031: Exchange of Real Property Held for Productive Use or Investment Whatever falls outside becomes recognized gain, and you pay capital gains tax on it in the year of the exchange, up to the total gain you actually realized.
You can never be taxed on more than you gained. But every dollar of boot pulls a dollar of that gain forward from “deferred” to “due now.”
The Three Forms Boot Takes
Boot shows up at closing in a few different ways. Some are obvious. Others catch investors by surprise because no money actually changes hands.
Cash Boot
Cash boot is money you receive as part of the exchange. If your relinquished property sells for more than the replacement property costs, the leftover comes back to you as cash. Sell for $500,000, buy for $420,000, and the $80,000 difference is cash boot, fully taxable up to your realized gain.
Mortgage Boot
Mortgage boot happens when the debt on your new property is smaller than the debt you paid off on the old one. The IRS treats that reduction in liabilities as economically equivalent to receiving cash.1Office of the Law Revision Counsel. 26 USC 1031: Exchange of Real Property Held for Productive Use or Investment Carry a $300,000 mortgage into the exchange and leave with a $200,000 one, and the $100,000 difference is boot, even though nothing hit your bank account.
Non-Qualifying Property and Other Items
Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 covers only real property. Machinery, equipment, vehicles, artwork, and collectibles no longer qualify.2Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips If the seller throws in restaurant equipment or furniture with the building, the fair market value of those items counts as boot.
Smaller items can trigger it too. Prorated rent and tenant security deposits credited to you at closing are income, not real property, so keeping them creates taxable boot. Many investors route those credits directly to the buyer instead of letting them flow through the exchange.
How Boot Gets Taxed
Boot has no special rate of its own. It’s taxed the way any real estate gain would be, which means up to three layers depending on your income and how much depreciation you’ve claimed.
Capital Gains Rate
The base rate is long-term capital gains, running 0%, 15%, or 20% depending on income and filing status.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses Most investors sit in the 15% bracket. For 2026, the 20% rate applies once taxable income passes $545,500 for single filers or $613,700 for joint filers.
Depreciation Recapture
If you claimed depreciation on the property you gave up, part of your recognized gain is treated as unrecaptured Section 1250 gain and taxed at a federal rate up to 25%.4Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Recapture comes off the top before regular capital gains rates apply to the rest.
Net Investment Income Tax
Higher earners owe an additional 3.8% Net Investment Income Tax on gains from the exchange. The surtax applies when modified adjusted gross income tops $200,000 for single filers or $250,000 for joint filers.5Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Those thresholds aren’t indexed to inflation, so they reach more filers each year. Stacked with capital gains and recapture, total federal tax on boot can approach 29% for high-income investors.
How to Avoid or Reduce Boot
Most boot is avoidable with planning. A few tactics do the heavy lifting.
Trade Up in Both Price and Debt
The cleanest way to avoid boot is to buy a replacement property that costs at least as much as the relinquished one and to carry at least as much debt on the new loan as you paid off on the old one. Equal or greater on both sides means no cash boot and no mortgage boot.
Add Cash to Offset Debt Relief
If your new mortgage is going to be smaller than the old one, you can bring extra cash to closing to plug the gap. Fresh cash offsets mortgage boot dollar for dollar. The reverse does not work: taking on additional debt does not cancel out cash boot. This one-way rule catches many investors by surprise.
Use Exchange Expenses
Certain closing costs paid from exchange proceeds reduce the taxable boot. The Form 8824 instructions allow qualifying exchange expenses to come off amounts that would otherwise be recognized gain.6Internal Revenue Service. 2025 Instructions for Form 8824 Qualifying expenses include:
- Real estate broker commissions
- Escrow and title company fees
- Attorney fees related to the exchange
- Transfer taxes and recording fees
- Qualified intermediary fees
Loan-related costs like mortgage origination fees and points are not exchange expenses and don’t reduce boot.
One boundary worth naming: boot is what makes part of an otherwise valid exchange taxable. A different kind of misstep, such as touching the sale proceeds yourself or missing the 45-day identification or 180-day closing deadlines, doesn’t just create boot. It disqualifies the entire exchange and makes the full gain immediately taxable.7Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
What Boot Does to Your New Property’s Basis
The tax basis in your replacement property carries over from the relinquished one, adjusted along the way. Under IRC 1031(d), you start with the old basis, subtract any cash you received, and add any gain you recognized on the exchange.8Office of the Law Revision Counsel. 26 USC 1031: Exchange of Real Property Held for Productive Use or Investment
Practically, paying tax on boot gives your replacement property a somewhat higher basis than a fully deferred exchange would. A higher basis means larger annual depreciation deductions and less gain when you eventually sell. Some investors accept a small amount of boot on purpose to step up basis, but the math only works when the future savings outweigh the current tax.
Reporting Boot on Form 8824
Every 1031 exchange goes on IRS Form 8824, “Like-Kind Exchanges,” whether or not boot was involved.9Internal Revenue Service. About Form 8824, Like-Kind Exchanges The form attaches to your income tax return for the year the exchange closed. For most individuals, that means April 15 of the following year.10Internal Revenue Service. When to File Any capital gains tax on the boot is due on that same date.
What You’ll Need
Pull the following from your closing statements before you start:
- Fair market value of both the relinquished and replacement properties
- Adjusted basis in the relinquished property: original cost, plus capital improvements, minus all depreciation claimed
- Mortgage payoff on the old loan and balance on the new loan, from the lender’s payoff statements
- Net cash received or paid at closing
- Exchange expenses paid from the proceeds
The Lines That Matter
Line 15 captures the total boot received: cash paid to you, the fair market value of non-like-kind property, and net liabilities the other party assumed, reduced by exchange expenses.11Internal Revenue Service. Form 8824, Like-Kind Exchanges Line 18 captures the adjusted basis of what you gave up, plus any remaining exchange expenses and any cash or property you paid the other side.6Internal Revenue Service. 2025 Instructions for Form 8824
Part III does the recognition calculation. Line 20 caps recognized gain at the smaller of Line 15 (total boot) or Line 19 (realized gain), which is how the statute keeps you from being taxed on more than you actually gained.11Internal Revenue Service. Form 8824, Like-Kind Exchanges Depreciation recapture inside the recognized gain moves over to Form 4797. Capital gain portions go on Schedule D.6Internal Revenue Service. 2025 Instructions for Form 8824 Keep every closing statement, the Form 1099-S reporting gross proceeds, and your qualified intermediary’s records in case the IRS reviews the exchange.