What is Boot in a 1031 Exchange?
Boot in a 1031 exchange refers to any value received by the exchanger that is not like-kind property. Boot is taxable — it represents the portion of the exchange that does not qualify for tax deferral. The word comes from the old English phrase "to boot," meaning "in addition to."
Types of boot
Cash boot: Any cash received from the exchange. If you sell a property for $500,000 and buy a replacement for $450,000, the $50,000 difference is cash boot and is taxable.
Mortgage boot: If the debt on the replacement property is less than the debt on the relinquished property, the difference is treated as boot. Selling a property with a $300,000 mortgage and buying one with a $200,000 mortgage creates $100,000 in mortgage boot.
Non-like-kind property: Receiving personal property (appliances, furniture) as part of the exchange creates boot equal to the value of those items.
How to avoid boot
To fully defer capital gains in a 1031 exchange: buy a replacement property of equal or greater value, reinvest all net proceeds (no cash taken out), and take on equal or greater debt (or add cash to make up the difference). Meeting all three conditions results in zero boot and full tax deferral.
Partial exchanges
Receiving some boot does not disqualify the exchange. It simply means the boot portion is taxable while the rest is still deferred. Many investors accept small amounts of boot when a perfect exchange match is not available.
For wholesalers
Understanding boot helps when marketing to 1031 exchange buyers. These buyers need replacement properties that meet specific value and timing requirements. If your deal fits their exchange criteria, they are highly motivated buyers with a tight deadline.