In this guide
What boot actually is
Section 1031 defers gain only to the extent you exchange real estate for real estate. Receive anything else in the deal — cash, debt relief, property that isn't like-kind — and the tax law calls that other stuff boot (the word comes from old trading slang: what you throw in "to boot"). The consequence is surgical rather than fatal: under §1031(b), you recognize gain equal to the boot received, capped at your total realized gain. The rest of the exchange stays deferred.
That cap matters in both directions. Boot never creates more taxable gain than the gain you actually have — but every dollar of boot up to that cap is taxed, and you cannot offset it with the basis you're carrying. Owners are routinely surprised that keeping "just $50,000 for a rainy day" out of a large-gain exchange produces a tax bill on the whole $50,000.
Cash boot
The obvious kind: exchange proceeds that end up in your pocket instead of in replacement property. It happens three ways — you instruct the qualified intermediary to release funds at closing; you buy a replacement cheaper than what you sold and the difference comes back to you; or money is left over after the final purchase and the QI returns it when the exchange period ends. All three are taxable events in the year of the exchange (or, for funds received the following year, potentially reportable under the installment rules — a timing question for your CPA, not a way out of the tax).
One rule prevents most cash boot: every exchange dollar must go into replacement property. Trade down in value and the shortfall is boot — there is no averaging, no netting against your basis, no grace amount.
Mortgage boot (debt relief)
The kind that catches sophisticated owners. When your sale pays off a loan, the tax law treats you as having received that payoff amount — so if the debt on your replacement property is smaller, the difference is mortgage boot, exactly as taxable as cash. The formula the calculator uses:
Mortgage boot = old debt paid off − new debt taken on − fresh cash you add (never less than zero)
The third term is the escape hatch: new cash offsets debt relief dollar for dollar. Pay off a $400,000 loan, take a $300,000 loan on the replacement, and add $100,000 of your own money — zero mortgage boot. Note the asymmetry: adding cash cures debt relief, but taking on extra debt does not cure cash boot; the netting only runs one way against debt.
The closing-statement traps
Small boot leaks hide in settlement statements. The distinction is between exchange expenses — costs of the sale/exchange itself, which reduce your amount realized and can be paid from proceeds harmlessly — and everything else, which generally can't:
| Safe to pay from exchange funds | Can create boot if paid from exchange funds |
|---|---|
| Broker commissions | Prorated rents credited to the buyer |
| Qualified intermediary fees | Security deposits transferred to the buyer |
| Title, escrow, and recording fees | Lender fees, points, and loan escrows on the new purchase |
| Transfer taxes | Property tax prorations and utility credits |
| Exchange-related legal fees | Repairs or credits negotiated with the buyer |
The practical fix is boring and effective: bring a personal check to closing for the non-exchange items, and have your intermediary review both settlement statements before signing. Treatment of specific items varies and the authority is scattered — this table reflects common practitioner treatment, and your CPA gets the final word on anything material.
How boot is taxed — with the math
Recognized gain from boot keeps the character it would have had in a plain sale, in the standard order: unrecaptured §1250 depreciation first, taxed at up to 25%, then remaining gain at your long-term rate (15% or 20%), with the 3.8% net investment income tax and your state's rate stacking where they apply — the same four-layer stack the main calculator applies to a full sale, applied to just the boot slice. (Full parameter sourcing lives in how our numbers work; state rates are in the 50-state table.) Reporting happens on Form 8824, which walks the boot arithmetic line by line.
Two worked examples
Example 1 — the rainy-day withdrawal. You sell for $1,500,000 with $825,000 of total gain and instruct the QI to release $50,000 to you at closing. Recognized gain: $50,000 (well under the $825,000 cap). Because your accumulated depreciation exceeds $50,000, the whole slice is taxed as recapture at 25% — $12,500 federal, before NIIT and state. The rainy-day fund cost a quarter of itself in tax; a home-equity line against the new property would have been cheaper liquidity.
Example 2 — the quiet debt downgrade. Same sale, $400,000 loan paid off. The replacement costs the full reinvestable amount but you finance only $250,000 and add no new cash. Mortgage boot: $400,000 − $250,000 = $150,000 recognized — roughly $37,500 of tax at recapture rates before NIIT and state, triggered without a dollar hitting your bank account. Adding $150,000 of fresh cash to the purchase — or matching the old loan — makes it zero. This is the mistake the two-rule formula below exists to prevent, and the Boot & Partial mode reproduces both examples with your numbers.
The two-rule avoidance formula
Every boot-avoidance checklist compresses to two rules applied at the closing table:
Rule 1 — equal or greater value: total replacement purchase price ≥ net sale price of what you gave up.
Rule 2 — equal or greater debt, or cash to cover: new debt + fresh cash ≥ old debt paid off.
Satisfy both, spend all exchange proceeds, keep non-exchange costs off the exchange funds — full deferral. The rules also explain the standard rescues: buying a second, smaller replacement property to absorb leftover proceeds, or using a DST interest as the "remainder bin," since fractional interests can be sized to the dollar and leveraged DSTs carry built-in non-recourse debt that helps satisfy Rule 2. Timing pressure on those decisions comes from the 45/180-day clocks.
When boot is the plan, not the mistake
Everything above treats boot as an accident. It can also be a decision: take $200,000 off the table, pay the computed tax on that slice, defer the rest. That's a partial 1031 exchange, and done with the math in advance it's a legitimate liquidity strategy — the tax bill is a known price for cash in hand, not a surprise in April. The planning version has its own treatment — the partial 1031 exchange guide covers the deliberate split, the recapture-first rate surprise, and the refinance alternative that often beats it; the short rule is that intended boot should always be modeled before closing, which is precisely what the calculator's Boot mode is for.