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1031 Boot: What It Is, How It Is Taxed, and How to Structure It

By Hans Goldstein · Updated 2026-09-27

Boot is anything you receive in a 1031 exchange that is not like-kind real estate: cash, a note, debt relief you do not replace, or personal property. It is taxed up to the amount of your gain, in the year you receive it, while the rest of the gain stays deferred in the new property. You can avoid boot by trading equal or up, or you can take it deliberately, and if you take it you can often choose when it is taxed.

This guide covers what counts, why boot happens, how it is taxed layer by layer, a worked example, and the options for structuring the boot you cannot or will not avoid.

Boot in one sentence

A 1031 exchange defers tax only on what you roll into real estate; anything you take out that is not real estate is boot, and it is taxable.

Most exchanges leak a little: a smaller replacement, a smaller loan, some cash for the kids, a closing cost paid the wrong way. Each leak is boot.

What counts as boot

• Cash. Money you take home, or exchange funds released to you.
• A note. An obligation you receive, such as the buyer's promissory note.
• Debt relief you do not replace (mortgage boot). Old loan $600,000, new loan $400,000, no added cash: the $200,000 drop is boot (simple example).
• Non-like-kind property. Since 2018, only real property is like-kind (Reg. §1.1031(a)-3). Appliances, furniture and other personal property that transfers with the building are a taxable sale, usually §1245 recapture. Many cost-segregated components still count as real property for 1031 purposes; ask.
• Some closing costs. Costs paid from exchange funds that are not transaction costs, such as loan fees for the new property or prorated rents and deposits, can create boot.

Netting: what offsets what

The liability rules in Reg. §1.1031(d)-2 decide mortgage boot:

Example 2 of that regulation is the classic trap: a taxpayer took on $150,000 of new debt against $80,000 of debt relieved and still recognized the $40,000 of cash he received. New debt covers old debt. It does not launder cash.

Boot is taxable up to your gain. If boot exceeds the total gain, the excess is simply a return of basis.

The 1031 clock boot lives with

• 45 days after the sale closes to identify replacements in writing, and 180 days (or your return due date, if earlier) to close on them (§1031(a)(3)).
• Identify up to three properties of any value, or more under the 200% or 95% rules. For a trade-down, naming several smaller buildings is often the first fix.
• A qualified intermediary (QI) holds the money. Your CPA, attorney or broker from the last two years cannot serve.

Why boot happens

The trade-down. You want a smaller building and some money out, or you simply cannot find a full-value replacement you would actually own.

The loan paydown. You want a smaller loan, or none, on the next building. Debt relief not replaced is boot.

The exit. You want part of your money out of real estate for good: diversification, a paycheck, a gift to the kids.

Mistakes at closing. Exchange funds used for non-exchange costs, cash left over after the replacement closes for less than planned, or a replacement loan that funds bigger than needed.

How boot is taxed

Recognized boot gain is taxed like any other gain on a sale of the building, in the year you receive it, in layers:

On a depreciated building, recognized gain is generally treated as coming out of the unrecaptured §1250 layer first on the Schedule D worksheet. So boot often lands on your most expensive capital-gain dollars. For a top-bracket Californian that layer can cost up to 42.1 cents on the dollar: 25% federal (a ceiling), plus 3.8%, plus 13.3% California. Plain long-term gain tops out at 37.1 cents, and cost-seg recapture at 54.1 cents.

Those are ceilings. The 13.3% needs more than $1 million of taxable income in the year, and the 25% applies only where your ordinary bracket is that high. But cash boot lands in one year on top of your other income, which is exactly how you reach the ceiling. See depreciation recapture in a 1031 for the recapture side, and the California installment sale guide for California's rules.

For a passive investor, boot gain is passive income. It absorbs passive losses you already have stuck on Form 8582 and losses from other rentals. But a 1031 is not a fully taxable disposition, so the relinquished building's own suspended losses are not released under §469(g), which requires that all realized gain be recognized. They stay suspended until a fully taxable sale.

A worked example

A simple example: A married couple sells a rental for $2,000,000 (ignore selling costs). Adjusted basis is $500,000 after $400,000 of straight-line depreciation, no cost segregation and no loan. Gain: $1,500,000. They buy a $1,600,000 replacement and keep $400,000.

If the $400,000 lands in a year where they are already in the top federal bracket and over the 3.8% line, the federal cost is up to $115,200 (28.8%). In California, at the ceiling, add up to $53,200 (13.3%), for up to $168,400 in all (simple example; ceilings, not their actual rates).

Now give them a loan. Same sale, but with a $600,000 loan paid off at closing and a new $400,000 loan on the replacement, and no cash added. Debt relief not replaced: $200,000. That is boot too, on top of any cash they keep. Adding $200,000 of their own cash to the purchase would have offset it (simple example).

How to avoid boot

• Trade equal or up in value, and reinvest all net equity through the QI.
• Replace the debt you pay off, with new debt or added cash.
• Identify more than one property, so leftover equity has somewhere to go.
• Use a Delaware Statutory Trust interest to absorb leftover equity. Rev. Rul. 2004-86 lets a qualifying DST interest count as like-kind replacement property. DST interests are securities sold through broker-dealers, usually only to accredited investors; in 2024 to 2026 SEC Form D filings for DST offerings, minimums of $50,000 and $100,000 were common (some offerings listed far lower), and reported selling commissions were mostly 5% to 10% of the offering (median about 6%), before sponsor fees. The DST's debt counts toward replacing yours. You give up control and liquidity, and the gain stays deferred.
• Pay non-exchange costs outside the exchange with your own money.

But do not overpay for a building just to avoid boot. A bad purchase can cost more than the tax it saved.

Structure the boot, not the whole deal

If you want money out, or you truly cannot use the leftover equity, there is a third way besides overpaying or taking cash: take the boot as an installment obligation, paid over years, and pay the tax as the payments arrive.

Section 453(f)(6) makes this work inside an exchange. The like-kind property is excluded from the contract price and from "payments," and the gross profit is reduced by the gain the exchange defers. Your basis goes to the new real estate first, so on a typical exchange each principal dollar of the note carries close to 100 cents of gain (simple arithmetic: with $400,000 of boot and far more than $400,000 of gain, contract price is $400,000 and gross profit is $400,000).

A simple example: Same couple, but the $400,000 is taken as a five-year note paid in equal principal installments. Each year about $80,000 of gain is recognized instead of $400,000 in one year, plus interest on the note, which is ordinary income. Each year's slice lands lower in the brackets, and for a couple with modest other income it may stay under the 3.8% line in every year (simple example).

There are two ways to hold that note:

• Seller financing. The buyer signs a note. A buyer's note received through a qualified intermediary is treated as the buyer's own note for §453 purposes (Reg. §1.1031(k)-1(j)(2)(iii)). You carry the buyer's credit risk, and a buyer who refinances can pay you off early, which brings the rest of the gain due in that year.
• A structured installment sale. The buyer pays in full at closing, and the deferred portion goes to an assignment company that makes the payments, usually funded by a fixed annuity the assignment company owns (some programs use a funding agreement). You are an unsecured creditor of the assignment company, the schedule cannot be accelerated, and the commission is built into the pricing. No IRS ruling specifically approves the structure; it relies on the general installment rules. And (j)(2)(iii) covers only the buyer's own note, not an assignment company's obligation, which is one reason the carve-out must be done precisely.

Details, including the closing mechanics, are in Using an Installment Sale for 1031 Boot. Compare the two holding options in seller financing vs. a structured sale.

The rules that keep the exchange intact

1. Carve it out at closing. The installment portion is written into the purchase contract, the exchange agreement and the escrow instructions before closing.
2. It never touches the intermediary as cash. If structured money passes through the QI, or you can direct exchange funds into it, you risk the restrictions on receipt in Reg. §1.1031(k)-1(g)(6), and with them the entire exchange, not just the boot.
3. Get sign-off before you list. Some intermediaries will not allow a carve-out. Exchange counsel should review the documents.

You cannot structure boot after closing or during the 45 days. By then the money is with the QI, and cash it releases to you is a payment when released. If an exchange begun in good faith fails across year end, the gain can fall in the year the cash is released instead of the year of sale (Reg. §1.1031(k)-1(j)(2)). That is the only relief. There is no "failed 1031 rescue" after the fact.

Where the losses come from: the new building

The replacement's basis splits in two (Reg. §1.168(i)-6):

• Exchanged basis carries over from the old building and keeps its old depreciation schedule. On used property it gets no bonus depreciation.
• Excess basis, funded by new debt or new cash, is treated as newly placed in service: fresh depreciation, cost segregation and, for 5-, 7- and 15-year components, 100% bonus for property acquired after January 19, 2025.

For a passive investor, a big first-year loss from the new building is passive, and so is the boot gain. When the boot is spread over years, that loss can meet each year's slice. When the replacement adds no new basis (a same-size loan, or an all-cash trade-down), there are no new losses, and structuring the boot is purely bracket spreading and deferral.

How it plays out: three illustrative cases

The book runs three exchanges through its engine. These are illustrative composites, not real clients; the figures are engine output and yours will differ.

Net position after 10 years.

Case 3. The owner wanted $2 million out of real estate for good. Year-one tax on the gain: $271k with cash boot, $0k structured, because the new building's bonus depreciation absorbed the first slices. Ten-year tax: $551k against $511k. But a full 1031 beat both. The structure won only the contest between two ways of taking money out.

Case 4. About $1.08 million of equity had nowhere to go in a $1.8 million replacement. Year-one tax: $274k cash against $47k structured. The structure came out $107k ahead of cash boot, all from spreading, because a same-size loan created no new basis.

Case 13. An all-cash trade-down structuring about $1.38 million. No new debt, no new depreciation, no losses. Structured boot still came out $208k ahead of cash boot, entirely from spreading and deferral.

The lesson: structure the boot you cannot or will not avoid, not boot you create. Boot you do not have to take beats both.

The §1245(b)(4) trap

If your old building was cost-segregated and the replacement has fewer §1245 components, you can owe recapture even with zero boot. Section 1245(b)(4) limits the recapture deferral to the value of §1245 property you acquire, plus gain recognized. Trading a cost-segregated apartment building for land, or for a simple building with little personal property, can trigger it. That recapture is taxed in the year of the exchange, and it cannot be spread on the installment method (§453(i)). Compare the §1245 property going out and coming in before you pick the replacement. More on recapture in a 1031.

Other options for the money

• Refinance after the exchange. Loan proceeds are debt, not income. But interest at today's rates can cost more than the money earns, interest on money spent personally is generally not deductible, and a refinance arranged as part of the exchange risks being treated as boot under the step-transaction doctrine. No rule sets a safe waiting period. The book compares this road in detail: see 1031, borrow and hold vs. an installment sale.
• Do not exchange at all. If you want out entirely, a sale spread over years may beat an exchange. See 30 options, honestly ranked.

Bottom line

Boot is the taxable slice of a 1031: cash, a note, unreplaced debt or personal property, taxed up to your gain, usually starting in the depreciation layer taxed at up to 25%. If you want to stay in real estate and need no money out, a full exchange often comes out ahead. If boot is unavoidable, or you want money out for good, you do not have to take it all in one April: an installment note from the buyer, set up before closing (not cash left with the intermediary and paid out later), can spread the tax and lets stuck passive losses meet each slice. Run your own numbers on the 1031 boot calculator (step-by-step math in partial 1031 exchange boot), and get the free book for the full decision tree. When you file, the exchange and its boot are reported on Form 8824.

Questions to ask your CPA

• How much boot is in my deal, counting cash, debt relief and personal property?
• Which layer will the recognized gain come from, and how much is §1245 recapture?
• Can a DST interest or a second replacement absorb the leftover equity, and at what cost?
• Does my replacement create excess basis, and how much bonus depreciation could it produce?
• Do I have suspended passive losses the boot gain could absorb?
• Will my qualified intermediary allow an installment carve-out at closing, and who is my exchange counsel?
• Does the §1245(b)(4) rule apply to my old building's cost segregation?
• What does California (or my state) do to the boot and to the deferred gain if the replacement is out of state?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.