💼 Understanding Boot: How Financing Can Affect Your 1031 Exchange Taxes

If you're planning a 1031 exchange to defer capital gains taxes on the sale of an investment property, you're likely focused on timelines, like-kind property requirements, and identifying suitable replacement properties.

But there’s one critical piece that often gets misunderstood—and that’s “boot.”

More specifically:

How your financing decisions can create boot—and trigger unexpected taxes.

This article breaks down what boot really means, how it’s created, and how you can avoid costly mistakes during your 1031 exchange.

🔁 Quick Refresher: What Is a 1031 Exchange?

A expert 1031 exchange finances—named after Section 1031 of the Internal Revenue Code—allows real estate investors to defer capital gains taxes when selling one investment property and purchasing another like-kind property.

To successfully defer the taxes, you must:

• Reinvest all proceeds from the sale
• Replace equal or greater value
• Maintain or increase your debt level
• Stick to the 45-day identification and 180-day closing deadlines
• Use a Qualified Intermediary (QI) to hold and transfer the funds

Miss any of these steps, and you could owe taxes. And that's where boot often comes in.

💡 What Is Boot in a 1031 Exchange?

In a 1031 exchange, boot refers to non-like-kind property or unreinvested value received by the investor during the exchange. Any boot received is taxable—it defeats the full deferral purpose of the 1031.

There are two main types of boot:

1. Cash Boot

Receiving cash or non-like-kind property during the exchange.

👉 Example: You sell a property for $700,000 but only reinvest $600,000. The $100,000 difference is cash boot and is taxable.

2. Mortgage (or Debt) Boot

Occurs when you don’t carry forward the same or greater loan amount into your replacement property.

👉 Example: You had a $400,000 mortgage on the old property but only borrow $300,000 on the new one. That $100,000 difference can be treated as debt relief, i.e., boot.

📘 How to Avoid Boot in Your 1031 Exchange

Here are steps you can take to stay compliant and avoid unexpected taxes:

✅ Match or Exceed Both Value and Debt

• Match the sale price with the purchase price
• Replace the full amount of debt—either through a new loan or additional equity

✅ Reinvest All Net Proceeds

• Don’t take any cash out of the transaction
• Let your Qualified Intermediary (QI) handle all funds

✅ Use a Knowledgeable Team

• Partner with a real estate attorney, CPA, and lender who understand 1031 exchanges
• Involve them before the sale of your relinquished property

🔚 Final Thoughts

Understanding how financing can impact your 1031 exchange taxes is critical to preserving your capital and maximizing returns.

To summarize: Boot = Taxable Value in a 1031 exchange, It can come from cash left over, or reduction in debt, The IRS wants you to fully reinvest both equity and debt, With careful planning, you can structure financing to avoid boot completely.

If you're planning a 1031 exchange, don’t just focus on the replacement property—analyze your financing structure closely. One misstep, and you could turn a tax-deferred deal into a tax liability.