'Boot' is a term used in 1031 exchanges to describe any value received in the exchange that is not like-kind property. Boot is taxable in the year of the exchange, even if the overall exchange is partially tax-deferred. Understanding boot — and how to minimize it — is critical to maximizing your tax deferral.
What Is Boot?
Boot can take several forms in a 1031 exchange. The most common types are cash boot (receiving cash proceeds from the exchange) and mortgage boot (reducing the amount of debt on the replacement property compared to the relinquished property).
- Cash boot: receiving cash from the exchange proceeds
- Mortgage boot: reducing your debt level in the exchange
- Personal property boot: receiving non-real property
- Net boot: the total taxable amount after offsetting different boot types
How to Minimize Boot
The most effective way to avoid boot is to acquire a replacement property of equal or greater value and equal or greater debt. If you want to reduce your debt load, you can offset mortgage boot by adding cash to the exchange.
- Acquire replacement property of equal or greater value
- Maintain equal or greater debt on the replacement property
- Add cash to offset mortgage boot if needed
- Consider an improvement exchange to use excess proceeds
1031 Exchange Boot: What It Is and How to Avoid It
Steve explains cash boot, mortgage boot, and net boot in plain language — with examples showing how each type of boot is calculated and strategies for minimizing or eliminating boot in your exchange.
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