In finance, particularly real estate and business asset transactions, “boot” refers to any additional consideration received by a taxpayer in a like-kind exchange that isn’t classified as like-kind property. Typically, this includes cash or property that differs in type from the exchanged assets and serves to balance unequal values between exchanged properties. This concept is especially relevant in Section 1031 exchanges, which allow taxpayers to defer capital gains tax when swapping investment or business property for similar property.

The term “boot” originates from the old English phrase “to boot,” meaning “in addition.” It aptly describes the extra amount received to equalize an exchange when the properties traded are not of equal value. While 1031 exchanges generally defer tax on capital gains, receiving boot triggers recognition of some taxable gain.

Why Boot Matters in a 1031 Exchange

A 1031 exchange permits property investors to defer capital gains taxes on the sale of property if they reinvest proceeds into like-kind property within specific IRS timelines. However, often the replacement property differs in value or debt structure. If the replacement property is worth less or comes with less debt than the relinquished property, the difference — the boot — is taxable.

For instance, if you sell a rental property and purchase a less expensive one, and receive cash or debt relief in the process, this boot is subject to tax up to the amount of gain realized.

Types of Boot

  1. Cash Boot: Extra cash received in the transaction beyond like-kind property. Example: selling property for $500,000 and buying another for $450,000 while receiving $50,000 in cash.

  2. Mortgage Boot (Debt Relief): Occurs when the mortgage on the new property is less than the mortgage on the old property, reducing your debt liability. The debt difference is treated like cash received and taxed accordingly.

  3. Personal Property Boot: Sometimes non-like-kind personal property (e.g., furniture or equipment) is received in an exchange with real estate. Its value counts as boot.

How Boot Triggers Taxable Gain

In a like-kind exchange, boot recognition causes you to pay taxes on the lesser of:

  • The boot received, or
  • The total gain realized on the exchange.

If your gain is less than the boot, you only pay tax on your gain. If you have no gain, no tax is due even if boot is received.

Real-World Examples

Example 1: Cash Boot
Sarah exchanges a rental duplex worth $600,000 (mortgage $100,000; basis $400,000) for a $550,000 property (mortgage $50,000). She receives $50,000 cash boot. Her total gain is $200,000 ($600,000 – $400,000). She will owe tax on the $50,000 boot received; the rest of her gain is deferred.

Example 2: Mortgage Boot
David exchanges a commercial property valued at $1,000,000 with a $400,000 mortgage for a replacement property valued at $950,000 with a $200,000 mortgage. He receives $200,000 in mortgage boot (debt relief), taxable up to his $400,000 gain ($1,000,000 – $600,000 basis).

Managing Boot in 1031 Exchanges

To minimize or avoid boot:

  • Acquire replacement property equal to or greater in value than the relinquished property.
  • Replace any mortgage debt fully or increase mortgage debt on the replacement property.
  • Avoid receiving cash through careful negotiation and financing.
  • Use cash-out refinancing before the exchange, as cash received before the exchange is generally not considered boot.
  • Work closely with a qualified intermediary and tax advisor to structure transactions effectively.

Common Mistakes About Boot

  • Ignoring mortgage relief as boot.
  • Believing all cash received equals boot without considering transaction costs or payment of closing fees.
  • Misunderstanding that boot triggers gain recognition only up to the amount of profit realized.
  • Overlooking personal property received in an exchange as boot.

Who Should Care About Boot?

  • Real estate investors using 1031 exchanges to defer capital gains.
  • Business owners exchanging equipment or property.
  • Taxpayers holding appreciated assets looking to defer taxes.
  • Tax professionals advising clients on like-kind exchanges.

Understanding boot ensures accurate tax planning and prevents unexpected tax liabilities when completing like-kind exchanges. For further details on like-kind exchanges, see our 1031 Exchange glossary entry.

References

  • Internal Revenue Service. “Like-Kind Exchanges – Real Estate Tax Tips,” IRS Publication 544. Available at https://www.irs.gov/publications/p544
  • Investopedia. “Boot,” retrieved 2025, https://www.investopedia.com/terms/b/boot.asp

For comprehensive guidance on handling capital gains tax in real estate, readers can also explore our Capital Gains Tax article.