What Is a 1031(c) Exchange? Boot, Taxable Gain, and Form 8824

In a 1031 exchange, boot is the taxable portion of the deal: any cash, debt relief, or non-like-kind property you receive alongside the replacement real estate. It doesn’t disqualify the exchange, but it forces you to recognize gain up to the fair market value of the boot received, or up to your total realized gain on the transaction, whichever is smaller.¹

What Counts as Boot

A pure 1031 swap involves nothing but qualifying real property changing hands. That almost never happens in practice. Anything of value you receive that isn’t qualifying replacement real estate is boot, and since 2018 Section 1031 applies only to real property, which narrows the “like-kind” side considerably.²

Boot shows up in three forms:

Cash boot. Net cash proceeds from the sale of the relinquished property, including cash equivalents such as a buyer’s promissory note.
Non-like-kind property. Vehicles, stocks, bonds, or personal-use property received alongside the replacement real estate.
Mortgage boot. The net reduction in your debt when the mortgage on the replacement property is smaller than the mortgage on the relinquished property. The IRS treats debt relief as the equivalent of cash.¹

The categories matter for netting, but the tax result is the same across all three: boot received triggers gain recognition.

Calculating the Taxable Portion

IRC §1031(b) sets the rule. When you receive both like-kind property and boot, gain is recognized “not in excess of the sum of such money and the fair market value of such other property.” Translated: recognized gain equals the lesser of your total realized gain or the boot received.¹

Realized gain is the total economic profit on the deal. Take the fair market value of everything you received (including boot), subtract selling expenses, then subtract the adjusted basis of the relinquished property. That figure represents the full profit. You only pay tax on the portion boot forces into recognition.

An example. You exchange a rental with a $350,000 adjusted basis for a replacement property worth $560,000 plus $40,000 in cash. Amount realized: $600,000. Realized gain: $250,000. Recognized gain: $40,000, because the boot ($40,000) is less than the realized gain ($250,000). The other $210,000 stays deferred.²

Boot is a ceiling on recognized gain, not a floor. If your realized gain in that same deal had been only $25,000, you would recognize $25,000, not $40,000. Boot cannot manufacture gain that doesn’t already exist. And if the exchange produces a loss, IRC §1031(c) prohibits recognizing it, even when boot changes hands.¹

How the Recognized Gain Is Taxed

Recognized gain from boot is not one rate but a stack. The gain gets split by what produced it, and each piece carries its own rate.

Depreciation recapture comes first. If you claimed depreciation on the relinquished property, that portion of the gain is unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.³

Any remaining recognized gain is taxed at long-term capital gains rates. For 2026 those rates are 0%, 15%, or 20%, depending on taxable income. Most taxpayers land at 15%. The 20% rate applies to single filers with taxable income above $545,500 or joint filers above $613,700.

Higher earners add a third layer. The 3.8% Net Investment Income Tax applies once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. Recognized 1031 gain counts as net investment income, so it can push you across the threshold or increase the tax on income already above it.⁴

Stacked together, a taxpayer in the 20% capital gains bracket with substantial depreciation recapture and income above the NIIT threshold can face an effective rate approaching 28.8% on the recognized portion.

Mortgage Boot and Liability Netting

Mortgage boot trips up more exchangers than any other form because nothing looks like cash changing hands. It happens automatically. If you carried a $400,000 mortgage on the relinquished property and only a $300,000 mortgage on the replacement, you’ve been relieved of $100,000 in debt, and the IRS treats that as $100,000 of boot.¹

The regulations soften this through liability netting. When both properties carry debt, the liabilities you shed are offset against the liabilities you take on, producing a single net figure.⁵ Shedding a $400,000 mortgage while assuming a $350,000 mortgage nets to only $50,000 of mortgage boot.

Cash paid by you can also offset mortgage boot. Contribute $50,000 of your own funds toward the replacement purchase and that cash cancels $50,000 of net debt relief dollar for dollar. This is the most common fix when you can’t match debt levels.

The offset does not run the other way. Taking on extra debt on the replacement property does not erase cash boot you received. Pocket $30,000 in cash and no amount of new mortgage on the replacement side will wash it out. Liabilities offset liabilities, and cash paid offsets debt relief, but new debt never offsets cash in your pocket.

Reducing Boot With Exchange Expenses

Legitimate exchange expenses paid from the sale proceeds reduce the amount treated as boot. Brokerage commissions are the biggest lever. Gross proceeds of $500,000 with a $30,000 commission paid from those proceeds means the amount treated as boot starts at $470,000. Title fees, recording costs, transfer taxes, and qualified intermediary fees work the same way when paid directly from exchange funds.

Not every closing cost qualifies. The practical test is whether the expense would exist if the whole deal were cash. Costs tied to obtaining a new loan don’t reduce boot. Loan origination fees, points, mortgage insurance premiums, and lender-required appraisals are financing costs, not exchange costs. If exchange funds pay them, they create taxable boot rather than reducing it.

Prorated property taxes, insurance payments, rent credits, and security deposits credited to the buyer are generally treated as outside the exchange. Some, like security deposits and prorated property taxes credited to the buyer, can sometimes be treated as the equivalent of debt relief for netting purposes. Classification on the closing statement has real dollar consequences, and mislabeling is an easy way to accidentally create boot.

Basis in the Replacement Property

The deferred gain doesn’t vanish. It gets embedded in the tax basis of the replacement property, waiting to surface when you sell without doing another exchange. IRC §1031(d) supplies the formula: start with the basis of the relinquished property, subtract the money received (including debt relief), and add any gain recognized.¹

For a partial exchange with boot, the full calculation is:

New Basis = Old Basis − Boot Received + Gain Recognized + Additional Cash Invested + New Liabilities Assumed

Back to the earlier example. Relinquished basis $350,000, cash boot $40,000, gain recognized $40,000. Replacement basis: $350,000 − $40,000 + $40,000 = $350,000. The recognized gain and the boot cancel out in the basis calculation. The $210,000 of deferred gain sits in the replacement property as a lower basis relative to market value, so you’ll pay tax on it eventually. Getting basis right also drives your future depreciation deductions.

How Boot Sneaks In: Constructive Receipt and Deadlines

Two mistakes can convert an otherwise clean exchange into a fully taxable sale, treating the entire proceeds as boot.

The first is touching the sale proceeds. Under the constructive receipt doctrine, if you have the ability to access the funds, you’re treated as having received them regardless of whether you actually did. Funds held by your attorney, real estate agent, or anyone else acting as your agent do not avoid this.⁶ The standard solution is a qualified intermediary holding the proceeds under a written agreement that restricts your access, which is the safe harbor the Treasury Regulations recognize.⁷ If the IRS finds you were in constructive receipt at any point, the entire amount becomes boot, taxable up to the realized gain.

The second is missing either statutory deadline. These are absolute and only extend for a presidentially declared disaster.⁶

45-day identification period. Within 45 days of transferring the relinquished property, you must identify potential replacement properties in writing, signed and delivered to someone involved in the exchange such as the seller of the replacement property or your qualified intermediary. Notice to your attorney or agent doesn’t count.¹
180-day completion period. You must receive the replacement property no later than 180 days after transferring the relinquished property, or the due date (with extensions) of your tax return for that year, whichever comes first.

The “whichever comes first” clause catches taxpayers whose timelines straddle the tax-year boundary. Sell in October with an April 15 return due date and you may have fewer than 180 days unless you extend your return. Filing an extension is standard practice in that situation.

Reporting on Form 8824

Every 1031 exchange goes on Form 8824, filed with the return for the year the exchange occurred.⁶ The form asks you to describe both properties, list transfer and receipt dates, compute realized and recognized gain, and calculate the replacement property’s basis. Even a fully deferred exchange with zero boot still requires the form. Skipping it doesn’t make the gain taxable on its own, but it invites scrutiny and makes the deferral harder to substantiate if the IRS asks later.

1
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
2
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
5
eCFR. 26 CFR 1.1031(b)-1 – Receipt of Other Property or Money in Tax-Free Exchange
6
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
7
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges