What Is Boot in a 1031 Exchange and How Is It Taxed?

Boot in a 1031 exchange is any value you receive that isn’t qualifying real property: leftover cash, a drop in your mortgage balance, or personal property mixed into the deal. Each dollar of boot is taxable in the year you receive it, but the rest of your gain stays deferred. So boot doesn’t wreck the exchange. It just carves out a taxable slice, and that slice can be taxed harder than people expect once depreciation recapture and the 3.8% surtax pile on top of the capital gains rate.

The Three Forms Boot Takes

Since the 2017 Tax Cuts and Jobs Act, Section 1031 covers only real property held for business or investment use.¹ Anything else you walk away with is boot. It shows up in three ways.

Cash boot is net sale proceeds you don’t reinvest in the replacement property. That includes money your qualified intermediary releases back to you, cash pulled at closing, and exchange funds spent on costs the IRS doesn’t treat as qualified exchange expenses.

Non-like-kind property boot covers things like a promissory note the buyer gives you as partial payment, furniture, equipment, or a vehicle. A seller-financed note counts at face value. Appliances or equipment priced separately from the real estate get added to your boot total.

Mortgage boot, also called debt relief, is the difference when the loan on your replacement property is smaller than the loan you paid off on the property you sold. No cash crosses the table, but the IRS treats the reduction as if you pocketed it.

Your total boot is the sum of all three, reduced by qualified exchange expenses paid from the proceeds.

How Much Gain Is Actually Taxed

Boot doesn’t make the whole gain taxable. You recognize gain equal to the lesser of your total realized gain or your total boot.¹ Form 8824 enforces this directly: you enter the smaller of boot received or realized gain, and never less than zero.²

Say you sell a rental property and realize a $300,000 gain. You receive $50,000 in cash that doesn’t go back into the replacement. Your taxable gain is $50,000; the other $250,000 stays deferred. Flip it: if the boot is $50,000 but your realized gain is only $30,000, you’re taxed on $30,000. Boot can never create more taxable gain than you actually have.

What Rate Applies

The recognized gain doesn’t sit at one flat rate. Up to three federal rates can stack.

Long-Term Capital Gains

Most investment property is held more than a year, so the gain qualifies for long-term treatment. For 2026, the federal rates are 0%, 15%, or 20%, based on taxable income and filing status.³ Most real estate investors land in the 15% or 20% bracket.

Depreciation Recapture at 25%

If you took depreciation on the property, the IRS wants a portion back. The slice of recognized gain tied to prior depreciation is unrecaptured Section 1250 gain, taxed at a maximum of 25%.³ In practice, that recapture comes off the top. If you have $50,000 of recognized gain and $40,000 of accumulated depreciation, the first $40,000 is taxed at up to 25% and only the remaining $10,000 drops to your capital gains rate.

The 3.8% Net Investment Income Tax

Higher-income investors owe an additional 3.8% on net investment income, including gain recognized from boot. It applies when modified adjusted gross income exceeds $250,000 for married filing jointly, $200,000 for single filers, or $125,000 for married filing separately, and hits the lesser of your net investment income or the amount your MAGI exceeds the threshold.⁴ Stack it all together and a top-bracket investor can be looking at 23.8% on the non-depreciation portion and 28.8% on the recapture portion, before any state tax.

Mortgage Boot and the Netting Rules

Mortgage boot catches people off guard because no money changes hands. Pay off a $500,000 loan on the way out and take on a $400,000 loan on the replacement, and the IRS says you received $100,000 of value.

There are two ways to offset it. Take on equal or greater debt on the replacement property and there’s no mortgage boot at all. Or contribute cash from outside the exchange at closing, dollar-for-dollar, to close the gap.

One trap: cash boot and mortgage boot are netted separately. Extra debt on the replacement property offsets mortgage boot, but it does not offset cash boot. If you receive $30,000 in cash from the exchange and also take on $30,000 of extra debt on the new property, you still owe tax on the $30,000 cash. The excess debt doesn’t cancel it.

Closing Costs That Quietly Create Boot

Which expenses you pay from exchange proceeds matters, because paying non-qualified costs out of the escrow turns those dollars into cash boot.

The IRS treats these as qualified exchange expenses that reduce proceeds without triggering tax: real estate commissions, qualified intermediary fees, title insurance premiums, escrow fees, transfer taxes, recording fees, and attorney fees tied directly to the sale or purchase.

Non-qualified costs include property tax prorations, HOA dues, property insurance, loan origination fees, and repair or maintenance expenses. If your closing statement shows exchange funds covering any of those, you’ve created boot. The fix is simple: pay those items from your own account, not from the exchange escrow. Review the preliminary closing statement a few days before closing so there’s still time to move line items off the exchange side.

How to Avoid Boot

The cleanest path is to buy a replacement property at or above the net sale price of what you sold, carrying debt that matches or exceeds the debt you paid off. Hit both targets and there’s no boot to tax.

When the numbers don’t line up, a few moves help:

Bridge any mortgage shortfall with personal funds at closing. A $75,000 cash contribution eliminates $75,000 of mortgage boot.
Keep non-qualified costs off the closing statement. Pay prorations, insurance, and loan fees from your own account.
Leave the exchange funds alone. The qualified intermediary should wire proceeds directly into the replacement property purchase. Any disbursement to you is taxable cash boot.
Trade up rather than sideways. A more expensive property with higher leverage naturally eliminates both cash and mortgage boot.

A tax advisor’s review of both settlement statements before closing is the most reliable way to catch a credit for prepaid rent, a seller-paid repair escrow, or a routine-looking line item that would otherwise convert exchange dollars into boot.

One boundary worth stating: boot is a partial-recognition event. Missing the 45-day identification deadline or the 180-day closing deadline is a different problem entirely, and it collapses the exchange rather than creating boot.¹ If you blow a deadline, the full gain is taxable, not just a slice.

Reporting Boot on Your Return

You report a 1031 exchange on Form 8824 in the tax year you transferred the relinquished property, even if the replacement hasn’t closed yet. The form calculates total boot on Line 15, realized gain on Line 19, and recognized gain on Line 20. Gain from the exchange of a capital asset then flows to Schedule D, while gain on business-use property flows to Form 4797. If part of the boot is a buyer’s note and you elect installment treatment, Form 6252 goes in alongside Form 8824.² If the recognized gain pushes you above the NIIT thresholds, Form 8960 picks up the additional 3.8%.⁴

1
Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use in a Trade or Business
2
Internal Revenue Service. Instructions for Form 8824 (2025)
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Internal Revenue Service. Net Investment Income Tax