Boot

Boot is any non-like-kind value an investor receives in a 1031 exchange, and it is the portion of the transaction that becomes taxable. The most common forms are cash boot, where the investor does not reinvest all of the net sale proceeds, and mortgage (debt-relief) boot, where the debt on the replacement property is less than the debt that was paid off on the relinquished property. To achieve full tax deferral, an investor generally must reinvest all of the net equity and acquire replacement property of equal or greater value, replacing any debt that was retired either with new debt or with additional cash. When boot is received, the investor recognizes gain up to the lesser of the boot received or the realized gain, and that gain may include depreciation recapture taxed at higher rates. Boot does not disqualify the entire exchange; it simply makes that slice taxable while the remainder stays deferred. Careful structuring, including replacing debt with fresh financing or adding cash to cover a debt shortfall, is how investors avoid unexpected mortgage boot.