Boot is anything of value you walk away with that isn't replacement real estate — leftover cash, a step down in debt, non-qualifying credits at closing. Boot doesn't kill your exchange; it just gets taxed, up to the amount of your gain. Most boot is accidental (debt nobody re-ran the math on), some is strategic (taking cash out on purpose), and all of it is predictable with one worksheet done before you go under contract.
Old English trading slang: when two people swapped items of unequal value, the extra thrown in to even the deal was given "to boot." In a 1031 exchange, boot is everything you receive that isn't like-kind real estate — and while receiving it doesn't invalidate the exchange, every dollar of it is taxable, up to your realized gain.
That last clause matters. Boot isn't a penalty or a failure state. It's simply the portion of your sale the tax code treats as cashed out rather than exchanged. Some investors take boot deliberately. The problem is the investors who take it accidentally — and find out in April.
The obvious kind: money that ends up in your pocket instead of the replacement property. Sell for $900K, buy for $820K, keep the $80K — that $80K is taxable. Also counts: exchange funds left over with your QI after closing, and any proceeds you receive directly at either closing table.
The kind that catches people. Pay off a $500K mortgage on the property you sell and take on only $380K on the property you buy, and you've received $120K of debt relief — taxable as boot, even though you never saw a dollar of it. Nobody hands you a check for mortgage boot; it exists only in the ledger, which is exactly why it's the most common surprise in exchange tax prep. The cure: replace the debt with equal-or-greater new debt, or plug the gap with fresh cash from outside the exchange.
Receive anything besides real property in the deal — a vehicle thrown in, a note from the buyer, personal property in the building priced separately — and it's boot at fair market value.
Certain items paid out of exchange proceeds at closing can generate small, avoidable boot: security deposits transferred, rent prorations, and non-exchange expenses (loan fees on your new mortgage, for instance) paid with QI funds rather than out of pocket. Individually small; collectively the reason a "perfect" exchange shows $6,400 of taxable gain. Have your CPA review the settlement statement before closing, not after.
The two-line safety check: (1) Is the new property's price ≥ the old one's? (2) Is the new debt ≥ the old debt paid off (or is the difference covered with new cash)? Answer yes to both and reinvest all proceeds, and you have no boot. Every boot surprise we've ever seen failed one of those two lines.
Boot is taxable up to the amount of your realized gain — it doesn't create gain that isn't there. And its character follows ordering rules your CPA cares about: depreciation recapture (taxed up to 25%) generally comes out first, then capital gain (0/15/20% federally, plus the 3.8% NIIT for higher incomes, plus state). Practical translation: the first dollars of boot are usually taxed at the highest rates in your stack. Small boot is disproportionately expensive boot.
Perfectly legitimate, occasionally smart. Common reasons: you want liquidity for something non-real-estate; your gain is modest and partial deferral is enough; or you're in a low-income year where the capital gains rate is favorable. The math to run: the tax on the boot versus the constraint of keeping the money locked in property. Decide it on paper before day zero — the worst version of this decision is the one made implicitly by sloppy exchange math.
Because DST interests are sold in exact dollar amounts and come with pre-set financing, they're the standard tool for zeroing out boot: $61,400 of would-be cash boot goes into a DST instead of your pocket; a debt shortfall gets matched by choosing a DST with the right leverage ratio. It's one of the few genuinely elegant uses of the structure — covered honestly, fees and all, in our DST guide.
No. The exchange survives; the boot portion is taxed, the rest stays deferred.
A cash-out refinance immediately before or after an exchange is one of the grayer areas in 1031 practice; done too close to the exchange with no independent purpose, the IRS can treat it as disguised boot. Time and documented business purpose are your friends. Ask a specialist, not a forum.
Standard exchange expenses (broker commissions, QI fees, title, transfer taxes) can generally be paid from proceeds without creating boot. Costs of your new loan generally can't. The line is technical — this is a settlement-statement-review conversation with your CPA.
A free, no-obligation introduction to a vetted 1031 or DST partner — with our referral relationship disclosed in writing. On the 45-day clock? Same-day attention.