1031 Exchange Boot in 2026: Cash Boot, Mortgage Boot, and How Much Gain Gets Taxed

What Is 1031 Exchange Boot?

1031 exchange boot is any cash, debt relief or non-qualifying property you receive in a like-kind exchange, and it is taxed up to the amount of your gain. Everything else stays deferred.

The word comes from an old trading phrase: “to boot” means “in addition.” In a perfect exchange you trade one investment property for another of equal or greater value and walk away with nothing extra in your hands. Anything extra is boot. The IRS describes the rule on its like-kind exchanges page: if you receive other property or money in the exchange, you recognize gain to the extent of that other property or money, but a loss is never recognized.

That last clause matters. Boot does not blow up the exchange. A partial exchange is still an exchange. You just pay tax on a slice of the gain today while the rest rolls forward. What I see investors get wrong is not the existence of boot but its sneakiness: it often arrives as a mortgage number on a settlement statement, not as a check.

This guide takes one set of numbers all the way through. If you need the basics first (the 45-day and 180-day deadlines, why you cannot touch the money), start with my 1031 exchange rules guide and come back.

What Are the Three Kinds of Boot?

There are three, and only the first two show up in most real estate deals.

Cash boot. Money that leaves the exchange and lands with you. Maybe the qualified intermediary (QI) had $140,000 left after the replacement closing and wired it to your account. That is cash boot, dollar for dollar.

Mortgage boot (debt relief). When your old property was sold, a mortgage got paid off. If the loan on the replacement property is smaller, you were relieved of debt you would otherwise have carried. Treasury Regulation 1.1031(d)-2 treats liabilities you are relieved of as money received. No cash changes hands, yet the tax result is the same as if it had.

Other property boot. A boat, a piece of equipment, a promissory note, personal property thrown into the deal. Since the 2017 tax law change, only real property qualifies for a 1031 exchange, so non-real-estate items in the transaction are boot too.

Type	What it looks like at closing	Taxable?
Cash boot	QI wires leftover funds to you	Yes, up to realized gain
Mortgage boot	New loan smaller than old loan, no extra cash from you	Yes, up to realized gain
Other property boot	Equipment, notes, personal property received	Yes, up to realized gain
Seller-side costs paid from proceeds	Commissions, title, QI fee	Generally not boot; they reduce the amount realized

How Do You Calculate Boot With a Worked Example?

You calculate boot by comparing what you gave up, net of costs and debt, with what you received. Here are the assumptions I will use everywhere below. They are illustrations, not a forecast, and your numbers will differ.

Assumptions (hypothetical rental building):

• Sale price of the relinquished property: $1,000,000
• Selling costs (commission, title, QI fee, transfer costs): $60,000
• Adjusted tax basis: $400,000, after $150,000 of depreciation already claimed
• Mortgage paid off at closing: $500,000
• Net cash to the QI: $1,000,000 minus $60,000 minus $500,000 = $440,000

Realized gain. Amount realized is $1,000,000 minus $60,000 = $940,000. Subtract the $400,000 basis and the realized gain is $540,000. Of that, $150,000 is the depreciation you took (the unrecaptured Section 1250 piece) and $390,000 is ordinary appreciation.

Rule of thumb for zero boot. To defer everything you need to buy replacement property costing at least $940,000 (the net sale price) and replace the $500,000 debt, either with a new loan or with your own cash. If you fall short on either side, the shortfall is boot.

Scenario A: no boot

You buy a $940,000 property with a $500,000 loan and the full $440,000 from the QI. Nothing comes back, debt is not reduced. Boot is $0, recognized gain is $0, deferred gain is $540,000, and the new property carries a basis of $940,000 minus $540,000 = $400,000.

Scenario B: cash boot

You buy a cheaper $800,000 property with a $500,000 loan. You need only $300,000 from the QI, so $140,000 is wired to you.

Cash boot is $140,000. Recognized gain is the lesser of boot ($140,000) or realized gain ($540,000), so $140,000. The other $400,000 is deferred, and the new basis is $800,000 minus $400,000 = $400,000.

Scenario C: mortgage boot

You buy an $840,000 property with a smaller $400,000 loan, using all $440,000 from the QI. No cash comes to you, but the debt dropped from $500,000 to $400,000.

Mortgage boot is $100,000, so recognized gain is $100,000 and $440,000 is deferred. New basis: $840,000 minus $440,000 = $400,000.

Scenario D: cash added to offset mortgage boot

Same $400,000 loan as C, but you add $100,000 of your own money and buy a $940,000 property. Debt relief of $100,000 is offset by $100,000 of new cash. Net boot is $0, same as Scenario A.

Scenario	Replacement price	New loan	Cash back to you	Net boot	Recognized gain	Deferred gain
A: full deferral	$940,000	$500,000	$0	$0	$0	$540,000
B: cash boot	$800,000	$500,000	$140,000	$140,000	$140,000	$400,000
C: mortgage boot	$840,000	$400,000	$0	$100,000	$100,000	$440,000
D: own cash added	$940,000	$400,000	$0 (you add $100,000)	$0	$0	$540,000

Notice that in B and C the replacement price is lower than $940,000 by exactly the boot. That is a handy sanity check: the gap between the net sale price and what you bought is your boot.

Why Is Recognized Gain the Lesser of Boot or Gain?

Because the tax code never taxes you on more than the gain you actually have. Section 1031 defers gain, and boot only unlocks gain that exists.

Suppose boot is $700,000 in the example above. Your realized gain is only $540,000, so recognized gain is $540,000, not $700,000. The extra $160,000 is simply a return of your basis.

The flip side: if you realize a loss on the old property, boot does not create a taxable gain at all, and the loss is not deductible under the exchange rules. That is why a 1031 is the wrong tool for a property that has fallen in value; a taxable sale would let you claim the loss.

How Is Boot Taxed in 2026?

Boot gain is generally taxed like an ordinary sale of real estate held more than a year, in layers. Three federal layers apply, plus your state.

1. Unrecaptured Section 1250 gain, up to 25%. The part of your gain that equals depreciation you claimed on the building is taxed at ordinary rates capped at 25%. If your bracket is lower than 25%, you pay your bracket. The IRS explains the capital gains framework in Topic 409.

2. Long-term capital gain at 0%, 15% or 20%. The rest of the recognized gain falls into these rates based on taxable income. For 2026, Revenue Procedure 2025-32 (see the IRS inflation adjustments) puts the 20% rate above roughly $545,500 of taxable income for single filers and about $613,700 for married filing jointly, and the 15% band starts near $49,450 and $98,900 respectively. Those are the figures reported in secondary summaries I checked; confirm the exact brackets in the revenue procedure.

3. Net investment income tax (NIIT), 3.8%. Applies to the lesser of your net investment income or the amount your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). These NIIT thresholds are set by statute and are not inflation-indexed. See the IRS page on net investment income tax.

4. State tax. Many states tax the gain as ordinary income. A few, including Oregon, Massachusetts, Montana and California, track out-of-state exchanges and can claw back deferred gain when the replacement property is outside the state. Check your state before assuming the federal deferral carries over.

What does the tax bill look like in the example?

I will use simple, deliberately rough assumptions: a taxpayer who pays 25% on the depreciation layer, 15% on other long-term gain, and 3.8% NIIT, with no state tax. Real bills depend on all of your other income.

Scenario	Boot / recognized gain	Depreciation layer (25% max)	Other gain (15%)	NIIT 3.8%	Estimated federal tax
B: cash boot	$140,000	$140,000 x 25% = $35,000	$0	$5,320	about $40,320
C: mortgage boot	$100,000	$100,000 x 25% = $25,000	$0	$3,800	about $28,800
E: larger boot	$300,000	$150,000 x 25% = $37,500	$150,000 x 15% = $22,500	$11,400	about $71,400

Two points about this table. First, I assumed the recognized gain is assigned to the depreciation layer first. That is the common reading and the most conservative one, but it is a reporting position you should confirm with your CPA, because it makes small boot amounts surprisingly expensive: a $140,000 boot can cost about 29% of itself. Second, the $540,000 of gain you did not recognize is not forgiven, it is carried into the new property’s lower basis (and its depreciation recapture potential carries too). See my guide to depreciation recapture for how the 25% layer works.

Can New Debt Offset Cash Boot?

No, and this asymmetry catches careful investors. The regulations let you net liabilities against liabilities, but they do not let new debt cancel cash you receive.

Here is how the netting works in practice:

• Debt relieved on the old property can be offset by debt you take on the new one.
• Debt relieved can also be offset by cash you put into the deal.
• Cash you receive cannot be offset by new debt, because taking out a bigger loan does not change the fact that cash left the exchange.

So the move “I’ll just finance the new building heavily and take the extra equity out” fails. If you want cash out, either take it knowingly as boot, or close the exchange first and refinance later. The IRS has not published a safe waiting period for post-closing refinancing, and a loan arranged before closing and funded right after can be treated as part of the exchange. Many advisors suggest waiting several months, but that is a planning habit, not a rule. Have your attorney review the facts.

How Do You Replace Debt When You Buy the Next Property?

You replace debt with a new loan, with your own added cash, or with a mix. All three work; the question is which fits your finances.

Method	How it works	Watch out for
New loan of equal or greater size	Lender funds the difference between price and QI cash	Higher interest cost, tighter cash flow, lender must be comfortable with exchange timing
Add your own cash	Money from outside the exchange is contributed at closing	Needs liquidity; cash comes out of savings, not from the sale
Mix of both	Part loan, part cash	Document each source with your QI and closing agent
Take the boot	Accept lower debt and pay tax on the difference	Immediate tax; can still be smart if the loan was costly

If you are moving from a leveraged building into a passive structure like a Delaware Statutory Trust, check how the trust’s own financing is counted, because the debt inside the trust may serve as your replacement debt. I cover that in my DST 1031 exchange guide.

How Does the Qualified Intermediary Create (or Prevent) Cash Boot?

The QI is both your shield against constructive receipt and a source of accidental cash boot. Understanding both sides saves money.

You cannot take possession of the sale proceeds or even have the unrestricted right to demand them, or the whole exchange may fail under the constructive receipt doctrine. That is why the QI holds the funds from the day the old property closes until the replacement closes. My post on qualified intermediary fees and selection walks through how to pick one and what a QI contract should say.

The exchange agreement can include limits on when funds are released. Under the safe harbor regulations, you generally cannot receive funds until the 45-day identification period has ended without a replacement being identified, or until the exchange period ends, whichever applies, except upon receiving the identified replacement property. This is not the same as boot. If the QI sends you leftover funds after the replacement closes, those funds are boot.

A practical habit: ask the QI to give you a written closing projection before you sign the replacement contract. It should show the sources and uses of funds line by line, including any “balance returned to exchanger” entry. If that line is not zero, you are looking at boot.

Also remember the clock. If you plan a reverse exchange where you buy first, boot calculations can shift because the property sits with an accommodation titleholder; see the reverse 1031 exchange guide.

What Mistakes Cause Surprise Boot?

Most unplanned boot comes from five habits. None of them is exotic.

1. Shrinking the loan without noticing. A lender offers a lower loan-to-value on the replacement property. The gap is mortgage boot unless you cover it with cash.
2. Counting selling costs twice. Some investors treat commissions as reducing boot a second time. Closing costs on the sale side reduce the amount realized; the replacement-side costs generally increase your basis. Mixing them up produces a wrong boot figure.
3. Letting the QI send back a small balance. A “rounding” refund of $8,000 is still cash boot. It is also a signal that you did not size the purchase correctly.
4. Paying personal expenses from exchange funds. Using proceeds to pay property taxes, prorated rents or unrelated bills can turn those payments into boot. Ask your QI which items are permitted.
5. Buying a smaller property because the 45-day deadline is closing in. Pressure leads to compromise. Identify backup properties early using the three-property or 200% rules covered in my 1031 exchange tax deferral guide.

A failure case (composite)

Here is a composite I have seen versions of, not a specific client. An investor sold a duplex for roughly $1 million, planning a full exchange. The replacement property was a smaller fourplex that cost about $140,000 less, and the lender approved a loan $100,000 below the old one. At closing the QI wired the leftover funds to the investor, which the investor happily used for a roof. Nobody ran a projection beforehand. The result was cash boot plus mortgage boot, and a tax bill that took a large piece of the deferral the investor thought they had secured. A one-page sources-and-uses sheet two weeks earlier would have shown the gap while there was still time to buy a pricier building or bring in cash.

When Is Taking Boot on Purpose a Smart Move?

Taking boot makes sense when the cash is worth more than the tax it triggers. It is a trade, not a failure.

Reasons investors accept it:

• Paying off expensive debt. If boot cash retires credit at 12 to 20%, the tax cost may be smaller than a year of interest.
• Funding renovations. Rehab money for the replacement property can come from boot, though an improvement exchange may let you use exchange funds for it with proper structure.
• Using low brackets. In a year when your other income is low, part of the recognized gain may fall into 0% or 15% long-term rates.
• Estate planning. If you plan to hold until death, a step-up in basis may erase deferred gain for heirs, which makes a small tax cost now less relevant to some families.

Whatever the reason, size the boot deliberately instead of discovering it. A good test: could you explain to your CPA, in one sentence, why you are taking this particular dollar amount? If not, adjust the purchase price or the loan.

How Is Boot Reported on Your Return?

Boot is reported on Form 8824, Like-Kind Exchanges, filed with the return for the year you transferred the relinquished property. The IRS Form 8824 page has the current form and instructions.

Form 8824 walks you through realized gain, boot received, recognized gain, deferred gain and the basis of the replacement property. The recognized gain then moves to Form 4797 (for business property, including depreciation recapture) or Schedule D, depending on the facts. Keep the closing statements for both properties, the QI exchange agreement, and your sources-and-uses worksheet in the same folder. Auditors ask for them.

If you used a DST or tenant-in-common interest, the sponsor or trust administrator typically provides allocations of debt that go into the same form. See the DST overview if that is your path.

What Should You Do Before Closing the Replacement Purchase?

Run the boot test in writing, at least two weeks before closing. Here is a short checklist.

1. Compute net sale price: sale price minus selling costs.
2. Confirm replacement price is at least that number.
3. List old debt paid off and new debt being taken.
4. If new debt is lower, calculate the cash you must add to offset the difference.
5. Ask the QI for a draft closing statement showing “balance to exchanger.”
6. Send everything to your CPA and exchange attorney.
7. Decide whether any boot is intentional, and estimate the tax at federal and state level.

The best exchanges look boring: the numbers tie out, the QI balance is zero, and nobody is surprised in April.

This article is general information about U.S. federal income tax rules for like-kind exchanges, not tax, legal or financial advice. Tax brackets, thresholds, state rules and IRS guidance change, and the examples above use hypothetical numbers. Consult a qualified intermediary, a CPA and an attorney familiar with Section 1031 before you sell or buy.