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: cash left over at closing, a reduction in your mortgage balance from the old property to the new one, or non-real-estate items like a promissory note or personal property thrown 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 undo 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 stack on top of your capital gains rate.

The Three Kinds of Boot

Since the 2017 Tax Cuts and Jobs Act, Section 1031 covers only real property held for business or investment.¹ Anything else you receive in the deal is boot by definition, and it comes in three forms.

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

Mortgage boot, also called debt relief, is the amount by which the debt on your replacement property is less than the debt you paid off on the sold property. No cash changes hands, but the IRS treats the reduction as if you pocketed the difference.

Non-like-kind property boot is anything other than qualifying real estate that comes into the exchange: a promissory note from the buyer, appliances or equipment priced separately from the real property, a vehicle, and so on. A note counts at its face value.

You can end up with one type or all three. Total boot is the sum, reduced by qualified exchange expenses paid from proceeds.

How Much of the Gain Is Taxable

Boot doesn’t make your whole gain taxable. You recognize gain equal to the lesser of two numbers: total boot received, or total realized gain on the sale.¹ Form 8824 walks through the arithmetic, and the IRS instructions confirm you enter the smaller of boot received (Line 15) or realized gain (Line 19), but never less than zero.²

Say you sell a rental and realize a $300,000 gain, and $50,000 of cash is left unspent. You recognize $50,000; the other $250,000 stays deferred. Flip the numbers: if boot is $50,000 but your realized gain is only $30,000, you’re taxed on $30,000. Boot can never force you to recognize more gain than actually exists.

What Rate You’ll Actually Pay

The recognized gain isn’t taxed at one flat rate. Up to three federal rates can stack on the same dollars, and that’s before any state tax.

Long-Term Capital Gains

Investment property held more than a year gets long-term capital gains treatment. Federal rates for 2026 are 0%, 15%, or 20% depending on taxable income and filing status.³ Most real estate investors fall into the 15% or 20% brackets.

Depreciation Recapture at 25%

If you took depreciation on the property, the IRS wants some of that back. The portion of recognized gain tied to prior depreciation is unrecaptured Section 1250 gain, taxed at a maximum 25%.³ In practice, depreciation recapture comes off the top: the first dollars of recognized gain are the recaptured ones. With $50,000 of boot and $40,000 of accumulated depreciation, the first $40,000 is taxed at up to 25% and only the last $10,000 gets the regular capital gains rate.

The 3.8% Net Investment Income Tax

Higher-income investors owe an additional 3.8% surtax on net investment income, and boot gains count. The NIIT 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 net investment income or the amount MAGI exceeds the threshold.⁴ Someone in the 20% bracket who owes NIIT can face a combined federal rate of 23.8% on the non-depreciation portion of boot and 28.8% on the recapture portion, before state tax.

Mortgage Boot and the Separate Netting Rule

Mortgage boot trips people up because nothing lands in their bank account. Sell a property with a $500,000 mortgage and buy replacement property with a $400,000 mortgage, and the IRS views that $100,000 of debt relief as value received.

Two ways to offset it:

Take on debt on the replacement property that equals or exceeds the debt you paid off. Match or beat the old mortgage and there’s no mortgage boot at all.
Bring outside cash to closing. Add $100,000 of your own non-exchange funds and the mortgage boot disappears dollar for dollar.

One rule catches people every year: cash boot and mortgage boot net separately. Extra debt on the new property offsets mortgage boot, but it does not offset cash boot. If you receive $30,000 cash from the exchange and also take on $30,000 of extra debt on the replacement, you still owe tax on the $30,000 cash. The extra debt buys you nothing on the cash side.

Closing Costs That Quietly Create Boot

Which expenses you pay from exchange proceeds matters, because non-qualified costs turn into cash boot. The IRS treats these as qualified, meaning they reduce proceeds without triggering tax: real estate commissions, exchange fees paid to the qualified intermediary, title insurance premiums, escrow fees, transfer taxes, recording fees, and attorney fees connected to the sale or purchase.

These are not qualified: property tax prorations, HOA dues, property insurance premiums, loan origination fees, and repair or maintenance expenses. If exchange funds pay any of them on the closing statement, those dollars become cash boot. The fix is simple. Pay non-qualified costs from your own account, not from the exchange escrow, and review the preliminary settlement statement a few days before closing so there’s time to move items off the exchange side.

How to Avoid Boot

The cleanest structure: buy replacement property that equals or exceeds the net sale price of what you sold, and carry debt on the new property that equals or exceeds the debt paid off on the old one. Hit both and there’s nothing left to tax.

When the numbers don’t line up, the practical moves are:

Close the mortgage gap with outside cash. A check from your own account at closing erases mortgage boot one dollar at a time.
Keep non-qualified costs off the exchange settlement statement. Pay prorations, insurance, and loan fees from personal funds.
Don’t touch the exchange funds. The qualified intermediary should wire everything directly to the replacement purchase. Any disbursement back to you is cash boot.
Trade up rather than sideways. Higher purchase price and higher leverage on the replacement naturally absorb both cash and mortgage boot.

Boot is often the product of routine-looking line items on a settlement statement: a credit for prepaid rent, a seller-paid repair escrow, a proration that gets netted the wrong way. A tax advisor reviewing both closing statements before signing is the most reliable way to catch these while there’s still time to move the money.

Missing a Deadline Is Worse Than Boot

Section 1031 sets two deadlines: 45 days after selling the relinquished property to identify potential replacements in writing, and 180 days to close on at least one.¹ The 180 days can be cut short if your tax return is due before that period runs out; filing an extension preserves the full window.

Missing either deadline doesn’t just create boot. It ends the exchange. The full sale proceeds become taxable in the year you sold, and capital gains tax, 25% depreciation recapture, the 3.8% NIIT if applicable, and state income tax all hit at once. That outcome is far worse than any partial boot. Calendar both dates the day the relinquished property closes.

Reporting Boot on Your Tax Return

You report the exchange on IRS 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. Recognized gain on a capital asset flows to Schedule D; gain on property used in a business flows to Form 4797.² 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