Take $300,000 in cash out of a $1,000,000 sale and the 1031 still works — but that $300,000 is taxed this year. Here’s how boot happens, what it costs, and the one-way netting rule most sellers learn too late.
In a 1031 exchange, boot is anything of value you receive that isn’t like-kind real estate. Receive boot and the exchange survives — but the boot is taxable in the year of the exchange, up to your realized gain. The rest of the gain stays deferred. That’s a partial exchange, and it comes in two flavors:
Boot isn’t always a mistake. Some sellers take boot on purpose — pull a known amount of cash out at a known tax cost, defer the rest. Done deliberately, it’s a pricing decision. Done accidentally, it’s a surprise tax bill on money you thought was sheltered.
Say you bought the rental years ago for $500,000 and took $100,000 of depreciation along the way — adjusted basis $400,000. You net $1,000,000 on the sale, buy a replacement for $700,000, and keep $300,000 in cash.
| Line | Amount |
|---|---|
| Realized gain ($1,000,000 − $400,000 basis) | $600,000 |
| Recognized now — the boot (lesser of boot or gain) | $300,000 |
| Still deferred inside the exchange | $300,000 |
| …of the recognized $300,000: depreciation recapture, taxed first, at up to 25% | $100,000 → up to $25,000 |
| …long-term capital gain at 15% (for this household) | $200,000 → $30,000 |
| …net investment income tax, 3.8% on the MAGI excess | $7,600 |
| Illustrative federal tax on the boot | ≈ $62,600 |
Notice what boot did not do: it didn’t blow up the exchange, and it didn’t tax the full $600,000 gain. It converted exactly the amount you kept into a current-year tax event — roughly 21 cents of every boot dollar in this example — while the other $300,000 of gain rode into the replacement property untouched.
Here’s where sellers get hurt. The rules let you offset boot in one direction only:
Cash out is taxable, full stop. Debt down is fixable — if you add money. Getting those two backwards is the single most expensive boot mistake, because it’s usually discovered at tax time, months after the closing that caused it.
Every one of these is visible before closing to anyone who runs the numbers first — which is the whole argument for running them first.
No. An exchange with boot is a partial exchange: the boot is taxable in the year of the exchange, up to your realized gain, and the remaining gain stays deferred. Taking boot on purpose — pulling out a known amount of cash at a known tax cost — is a legitimate strategy some sellers choose deliberately.
No. Recognized gain keeps its character: depreciation recapture generally comes out first, taxed at up to 25%, then long-term capital gain at 0%, 15%, or 20% depending on your income, and the 3.8% net investment income tax can apply on top above the MAGI thresholds. The same boot amount produces different bills for different households.
No — the netting rule is one-way. Debt relief (mortgage boot) can be offset by fresh cash you add to the replacement purchase, but cash you take out of the exchange cannot be offset by borrowing more on the new property. Cash out is taxable, full stop.
If the debt on your replacement property is smaller than the debt you were relieved of on the old property, the difference is treated as boot — even though no cash hit your pocket. Trading down in debt without adding equivalent cash creates a taxable event many sellers never see coming.
The free briefing covers the deadlines — and the calculator prices your sale: gain, recapture, and the surtax, on your figures.
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