1031 Exchange Boot: What It Is and How It Is Taxed

Boot is money or other non-like-kind property received in a 1031 exchange. Receiving boot does not necessarily disqualify the entire exchange, but it can cause some of the realized gain to be recognised currently.

The amount of boot received and the amount of taxable or recognised gain are not necessarily identical.

That distinction is fundamental. A 1031 exchange can be partly tax deferred and partly taxable. The qualifying like-kind portion of the transaction can remain eligible for Section 1031 treatment, while cash, non-like-kind property or certain net liability effects can cause part of the realized gain to be recognised.

Current IRS guidance distinguishes between the gain realized on the exchange and the amount that must actually be recognised. Form 8824 Part III performs that calculation, with recognised gain generally limited to the smaller of the applicable recognised-gain amount or the realized gain on the exchange.

What Is Boot in a 1031 Exchange?

Boot is the commonly used term for money or other value received in an exchange that does not qualify for Section 1031 nonrecognition treatment.

It can include:

• cash received;
• property received that is not qualifying like-kind real property; and
• certain net liability amounts treated similarly to money received.

For exchanges completed under the current Section 1031 rules, nonrecognition treatment is generally limited to qualifying real property held for investment or productive use in a trade or business.

If an investor receives money or non-like-kind property in addition to qualifying replacement real estate, the transaction may become partially taxable rather than losing Section 1031 treatment altogether.

Boot should therefore not be thought of as a separate tax. It is consideration received within the exchange that can cause some otherwise deferred gain to become currently recognised.

Is Boot Taxable in a 1031 Exchange?

Receiving boot can result in taxable gain, but the amount of boot and the amount of gain recognised are not automatically the same.

Receiving boot can cause gain to be recognised, but the amount of boot and the amount of recognised gain are not necessarily the same. Recognised gain cannot exceed the realised gain on the exchange.

Three concepts need to be kept separate.

Realized gain is the economic and tax gain generated by disposing of the relinquished property.

Recognised gain is the portion of that gain that must currently be included for tax purposes rather than deferred under Section 1031.

Boot is money or non-like-kind property received, including certain net liability effects, that can trigger recognition of realized gain.

In a partially nontaxable exchange, recognised gain is generally limited by both the gain realized and the applicable recognised-gain calculation involving money, non-like-kind property and other relevant amounts.

This is why it is wrong to use the terms boot and taxable gain interchangeably.

An investor might receive $40,000 of cash boot but have less than $40,000 of realized gain. In that situation, the cash received does not create additional gain that did not already exist.

The boot can trigger recognition. It does not manufacture gain.

How Is 1031 Exchange Boot Taxed?

Boot affects how much of the gain realized in a 1031 exchange can continue to be deferred.

In a partially nontaxable exchange, the realized gain on the transaction is calculated and then compared with the applicable recognised-gain amount based on money received, the fair market value of non-like-kind property received, applicable net liability effects and exchange expenses.

The recognised amount is generally limited to the smaller of:

1. the applicable recognised-gain amount; or
2. the realized gain on the exchange.

For example, if an investor has $300,000 of realizsed gain and receives $40,000 of cash, the cash may cause $40,000 of that existing gain to be recognised.

If the investor instead has only $25,000 of realized gain, receiving $40,000 of cash does not create $40,000 of recognised gain. The recognised amount would generally be limited by the $25,000 gain actually realized.

Is There a 1031 Boot Tax Rate?

There is no single universal “1031 boot tax rate”.

Section 1031 determines how much gain is recognised rather than assigning one tax rate to everything commonly described as boot.

Once gain becomes recognised, its tax character can depend on the nature of the relinquished property, how it was used, depreciation previously claimed and other features of the transaction.

It is therefore too broad to say that all boot is simply “taxed at capital gains rates”.

The first question is how much gain is recognised. The tax character of that recognised gain is a separate issue.

Types of Boot in a 1031 Exchange

Boot most commonly arises through cash, non-like-kind property or the treatment of liabilities within the exchange.

Cash Boot

Cash boot occurs when an investor receives money as part of the exchange rather than having all of the relevant value remain within qualifying like-kind property.

A straightforward example would be an investor completing an otherwise qualifying exchange but ultimately receiving $40,000 in cash.

That $40,000 is taken into account when determining how much gain must be recognised.

However, the cash received should not automatically be labelled $40,000 of taxable gain without first knowing how much gain the investor realized.

Cash boot can cause gain to be recognised up to the amount of cash received, but recognised gain cannot exceed the gain realised on the exchange.

If the investor has sufficient realized gain, the full cash amount may result in recognition. If the realized gain is lower, recognition is generally constrained by that lower realized-gain figure.

Exchange expenses can also affect the amount ultimately used in the recognised-gain calculation.

Non-Like-Kind Property

An investor can also receive property that does not qualify as like-kind real property under Section 1031.

The current Section 1031 nonrecognition rules generally apply to qualifying real property. When other property is received alongside qualifying replacement real estate, the fair market value of that non-like-kind property can contribute to the amount of gain recognised.

Receiving non-like-kind property does not necessarily make the entire exchange taxable.

Instead, the exchange can be partially nontaxable. The qualifying real property can remain eligible for Section 1031 deferral while the non-like-kind consideration causes some of the realized gain to be recognised currently.

The same limiting principle still applies. Recognition is constrained by the amount of gain actually realized.

Mortgage or Debt-Relief Boot

Liabilities are where simplistic explanations of boot are particularly dangerous.

A common description suggests that an investor merely compares the mortgage on the relinquished property with the mortgage on the replacement property. If the replacement property’s debt is lower, the difference is then labelled taxable mortgage boot.

That is not an adequate description of the current Form 8824 calculation.

Debt relief can contribute to an amount treated similarly to money received, but liabilities are considered on a net basis within the exchange calculation. A reduction in mortgage balance does not automatically equal taxable boot dollar-for-dollar.

Form 8824 works with net liabilities assumed by the other party.

The instructions consider whether liabilities assumed by the other party exceed liabilities assumed by the taxpayer together with applicable cash and non-like-kind property given up. That net amount then feeds into the wider recognised-gain calculation.

This means there is no reliable universal formula of:

old mortgage − new mortgage = taxable boot.

The complete exchange must be considered.

How Do Liabilities Affect Boot?

Liabilities assumed by the other party can contribute to the amount treated as received, but Form 8824 applies a net-liability calculation rather than treating every liability relieved as separate boot.

But the liability relieved does not operate in isolation.

Conceptually, the calculation considers the relationship between:

liabilities relieved

and

liabilities assumed, together with applicable cash or other consideration paid.

If the taxpayer assumes sufficient liability on the replacement side of the transaction, there may be no net liability amount added to the recognised-gain calculation.

The current Form 8824 instructions provide a useful illustration.

In the IRS example, one taxpayer transfers property subject to an $80,000 mortgage and receives replacement property subject to a $150,000 mortgage that the taxpayer assumes. Although the other party assumes the taxpayer’s $80,000 liability, the $80,000 is not separately added to that taxpayer’s recognised-gain calculation because the liability the taxpayer assumed is greater.

That example demonstrates why simply calculating the difference between an “old mortgage” and a “new mortgage” can be misleading.

Form 8824 also distinguishes between recourse and nonrecourse liabilities when determining whether and to what extent a liability is treated as assumed.

The precise financing structure therefore matters.

There is no universal mortgage-boot calculator that can accurately determine the tax result solely from the mortgage balances attached to the two properties.

1031 Exchange Boot Example

Consider an investor completing a 1031 exchange with the following facts:

• Relinquished property fair market value: $600,000
• Adjusted basis: $300,000
• Replacement property fair market value: $560,000
• Cash received: $40,000
• No liabilities
• No exchange expenses
• No other property received or transferred

Assume all other requirements for Section 1031 treatment are satisfied.

Step 1: Calculate the Realized Gain

The investor disposes of property worth $600,000 with an adjusted basis of $300,000.

$600,000 − $300,000 = $300,000 realized gain

The exchange has therefore generated $300,000 of realized gain.

Step 2: Identify the Boot

The investor receives $40,000 in cash.

Cash boot = $40,000

The cash is taken into account when determining how much of the $300,000 realized gain must be recognised.

Step 3: Calculate the Recognised Gain

The investor has:

$300,000 realized gain

and

$40,000 cash boot.

Because the realized gain exceeds the $40,000 cash amount:

Recognised gain = $40,000

The remaining gain is:

$300,000 − $40,000 = $260,000 deferred gain

Assuming the other Section 1031 requirements are satisfied, $260,000 of the realized gain therefore remains deferred.

This does not mean that the $40,000 cash itself has somehow become a separate tax. Instead, receiving the cash causes $40,000 of the investor’s existing $300,000 realized gain to become recognised.

What If Realized Gain Is Less Than the Boot?

Now change the facts slightly.

Suppose an investor receives the same $40,000 in cash but has only $25,000 of realized gain.

The recognised amount would generally be limited to:

$25,000 recognised gain

rather than automatically becoming $40,000 simply because $40,000 of cash was received.

This is the reason the statement “boot equals taxable gain” is unreliable.

Boot can cause gain to be recognised. It is not itself the measurement of how much gain exists.

1031 exchange tax treatment depends on the facts of the transaction. Complex exchanges involving liabilities, multiple properties, non-like-kind property or depreciation issues may require transaction-specific tax advice.

Because this simplified example assumes no exchange expenses or liabilities, the realized-gain calculation can be shown directly from the values above. Exchange expenses and liabilities can change the amount-realized calculation in an actual exchange.

How Do Exchange Expenses Affect Boot?

Exchange expenses can affect the amount used to calculate recognised gain in a partially nontaxable exchange.

Current Form 8824 instructions reduce the relevant cash, non-like-kind property and net-liability amount by applicable exchange expenses, but not below zero. Publication 544 similarly explains that qualifying exchange expenses can reduce the amount used when calculating recognised gain in a partially nontaxable exchange.

Qualifying exchange expenses can affect the amount used in the recognised-gain calculation. Not every closing-statement item is an exchange expense, so do not simply subtract every closing cost from boot.

The distinction is important because a settlement or closing statement can contain many amounts that are not treated as exchange expenses for this purpose.

Items such as property-tax adjustments, rent prorations, security deposits and repairs are not automatically exchange expenses merely because they appear on the closing statement.

Exchange expenses therefore need to be identified according to their tax treatment rather than simply grouped together under “closing costs”.

How Does Boot Affect Replacement-Property Basis?

Boot can affect replacement-property basis, but the relationship is not simply “boot received = basis reduced by the same amount”. The basis calculation also considers items such as the adjusted basis of the relinquished property, liabilities, additional costs and recognised gain.

Because recognised gain can increase basis while money received and certain liability effects can reduce it, replacement-property basis should be calculated using the full exchange rather than by subtracting boot from the replacement property’s purchase price.

For the full calculation, see 1031 replacement-property basis.

Where Is Boot Reported?

The exchange itself is generally reported on Form 8824. Money, non-like-kind property and relevant liability amounts form part of the Form 8824 calculation used to determine how much gain is recognised.

Where recognised gain ultimately appears elsewhere on the federal return depends on its character and the transaction.

The important distinction for this page is that Form 8824 calculates and reports the exchange itself, while recognised amounts may also need to flow elsewhere on the tax return.

For the full reporting process, see How to Report a 1031 Exchange.

For more detail on where recognised amounts may appear elsewhere on the return, see Where to Report a 1031 Exchange on Your Tax Return.

Can You Avoid or Reduce Boot?

Potential boot is best treated as a transaction-planning issue rather than something to address after the exchange has already closed.

The objective should not simply be to eliminate every dollar of current tax regardless of the economics. Instead, the investor needs to understand how cash, replacement property, liabilities and other consideration interact before committing to the final transaction structure.

Acquire Sufficient Qualifying Replacement Property

Receiving cash back or other non-like-kind value can result in part of the realized gain being recognised.

This makes the economics of the replacement purchase important before closing. The investor should understand how much qualifying property is being acquired and whether the transaction is expected to return cash or other nonqualifying value.

However, this should not be reduced to a universal rule that an investor must always acquire replacement property of equal or greater value.

That shortcut can sometimes describe a straightforward fully deferred exchange, but purchase price alone does not perform the statutory or Form 8824 calculation. Liabilities, cash, exchange expenses and other transaction facts can change the result.

Plan Liabilities and Cash Together

Do not evaluate mortgage balances in isolation. Debt relief, liabilities assumed and cash contributed can interact within the exchange calculation.

Where an exchange involves meaningful changes in financing, the relevant Form 8824 mechanics should therefore be modelled before closing rather than relying on a simple comparison between the relinquished property’s debt and the replacement property’s debt.

Avoid Accidentally Receiving Exchange Proceeds

Deferred exchanges are generally structured so the taxpayer does not take actual or constructive receipt of the sale proceeds while the exchange remains in progress.

Properly structured qualified-intermediary arrangements can prevent the taxpayer from being treated as having received the funds during the exchange period.

The practical point is simple. Exchange proceeds should not casually pass through the investor’s control before being used to acquire replacement property.

Identify Non-Like-Kind Value Before Closing

Boot is not limited to cash.

Personal property, cash and other nonqualifying consideration can complicate a transaction can complicate a transaction and should be identified before closing rather than discovered afterwards when the tax return is being prepared.

Boot is easier to plan around before the exchange closes than to repair afterwards.

Boot Isn’t Automatically a Failed Exchange

An investor may deliberately accept some recognised gain rather than acquire a poor replacement investment purely to maximise tax deferral.

The relevant decision is not simply whether boot can be eliminated, but whether the economic benefit of doing so justifies the additional investment, financing or transaction constraints involved.

Tax deferral is one factor in an investment decision. It should not require an investor to accept an economically inferior asset merely to achieve a theoretically cleaner exchange.

Common Boot Mistakes

Assuming Any Boot Invalidates the Entire Exchange

Receiving boot does not automatically make the entire transaction taxable.

A transaction can potentially remain a qualifying Section 1031 exchange while part of the realized gain is currently recognised because money or non-like-kind property was received.

Treating Boot and Recognised Gain as Identical

Boot can cause gain to be recognised, but recognised gain is limited by the amount of gain actually realized and determined through the exchange calculation.

The two figures may be identical in a simple transaction, but that does not make them the same concept.

Calculating “Mortgage Boot” From Mortgage Balances Alone

Comparing the mortgage attached to the relinquished property with the mortgage attached to the replacement property does not by itself determine recognised gain.

Liabilities can be netted, and cash paid and other consideration can affect the calculation.

Assuming Buying a More Expensive Property Automatically Eliminates Boot

Replacement-property price is important, but it does not tell you the complete tax result.

Cash received, liabilities, non-like-kind property, exchange expenses and other transaction facts can still matter. The full exchange needs to be analysed rather than relying on purchase price alone.

Ignoring Non-Like-Kind Property

Boot is not limited to cash.

Receiving property that does not qualify as like-kind real property can also contribute to recognised gain, even where the main replacement asset qualifies for Section 1031 treatment.

Waiting Until After Closing to Think About Boot

Many of the factors that create boot are determined by the structure of the transaction itself.

Once property has been transferred, proceeds distributed, financing completed and non-like-kind property received, some of those choices may no longer be capable of being changed.

Potential boot should therefore be considered while the exchange is being structured, not discovered only when Form 8824 is prepared.

Before Closing a 1031 Exchange

Check whether the transaction involves:

• cash being returned to you;
• non-like-kind property;
• debt being paid off;
• new liabilities being assumed;
• additional cash being contributed;
• exchange expenses; or
• any expected recognised gain.

These items should be considered together rather than using a simple “replacement price minus sale price” test.

Related 1031 Exchange Guides

Need the full exchange rules?

See What Is a 1031 Exchange?.

Need to calculate replacement-property basis?

See How to Calculate Basis in a 1031 Exchange.

Need to file the transaction?

See How to Report a 1031 Exchange.

Need to understand where recognised gain appears on the federal return?

See Where to Report a 1031 Exchange on Your Tax Return.

FAQs

What is boot in a 1031 exchange?

Boot is money or other non-like-kind property received in an exchange. Certain net liability effects can also be treated as money received for purposes of calculating recognised gain.

Is boot taxable in a 1031 exchange?

Receiving boot can cause gain to be recognised, but boot and recognised gain are not necessarily the same amount. Recognised gain is limited by the realized gain on the exchange.

Does receiving boot disqualify a 1031 exchange?

No. An otherwise qualifying exchange can be partially taxable, with some gain recognised currently while qualifying gain potentially remains deferred under Section 1031.

What is cash boot?

Cash boot is cash or money received as part of the exchange rather than remaining within the qualifying exchange structure.

How do mortgages and liabilities affect 1031 boot?

Debt relief can contribute to an amount treated as money received, but liabilities are considered within the broader exchange calculation. A reduction in mortgage balance does not automatically equal recognised gain dollar-for-dollar.

Is boot taxed at the capital gains tax rate?

There is no single universal tax rate for 1031 exchange boot. The character of recognised gain and the facts of the transaction determine its federal tax treatment.

Can I intentionally receive boot?

Yes. An investor can potentially complete a partially taxable exchange and intentionally receive cash or other value. Whether that makes economic sense depends on the investment and tax consequences rather than maximising deferral at any cost.

Where is boot reported?

A 1031 exchange is generally reported first on Form 8824. Money, non-like-kind property and relevant liability amounts are incorporated into the Form 8824 calculation, while recognised gain may also be reported elsewhere on the federal return depending on its character.

Primary IRS Sources

• IRS Instructions for Form 8824, Like-Kind Exchanges
• IRS Publication 544, Sales and Other Dispositions of Assets
• IRS Publication 551, Basis of Assets

Last updated and IRS guidance verified: September 8, 2026