What is boot in a 1031 exchange?

Boot is any value you receive in an exchange that is not like-kind real property. It comes in two forms. Cash boot is net cash or other non-like-kind property you receive — including sale proceeds that are not reinvested, and often overlooked items such as security deposits or non-transaction costs paid from exchange funds. Mortgage boot, also called debt relief, is the net reduction in liabilities between the property you sold and the property you bought. Boot does not void the exchange; it is taxable to the extent of your realized gain, and the rest of the gain stays deferred.

Do I have to replace my mortgage in a 1031 exchange?

To defer all gain you must acquire replacement property of equal or greater value and carry equal or greater debt — or make up any debt shortfall with additional cash out of pocket. If you sold a property with a $1,000,000 loan and buy one with a $700,000 loan, the $300,000 of debt relief is mortgage boot and is taxable, even though you never touched a dollar of cash. Contributing $300,000 of your own cash to the purchase offsets that mortgage boot dollar for dollar and restores full deferral.

How do cash boot and mortgage boot net against each other?

Within limits. Cash you add to the exchange offsets cash boot received at the same closing, and cash you add also offsets mortgage boot received. Additional debt you take on the replacement property offsets mortgage boot received. The asymmetry that surprises people is the one direction that does not work: taking on more debt does not offset cash boot you received. If you pulled $200,000 of cash out of the closing, borrowing an extra $200,000 on the replacement property will not fix it — that cash is taxable.

Is a partial 1031 exchange worth doing?

Often yes. Boot is taxable only to the extent of realized gain, and the remaining gain still defers, so a partial exchange is not an all-or-nothing failure. An owner who needs $250,000 of liquidity can take it as boot, pay tax on that slice, and defer the rest. The mistake is doing it accidentally. Deliberate boot is a financing decision; accidental boot is a surprise tax bill in a year when the cash has already been spent on the replacement property.

What tax rate applies to boot?

Boot is taxed as recognized gain in the year of the exchange, and the character follows the underlying gain rather than a single flat rate. Depreciation taken on the relinquished property is generally recaptured first as unrecaptured Section 1250 gain at rates up to 25%, with the remainder taxed at long-term capital gains rates, and the 3.8% net investment income tax may apply on top. Because recapture is layered in ahead of capital gain, a relatively small amount of boot on a long-held, heavily depreciated property can be taxed at a higher effective rate than owners expect. Confirm the specific calculation with your CPA.

1031 Exchange · September 25, 2026 · Steven Owen

Boot and debt replacement: why “I reinvested everything” still triggers tax

To defer all of your gain, the replacement property has to be worth at least as much as what you sold and carry at least as much debt. Most owners understand the first half. The second half is where exchanges quietly generate tax bills: if you sold a property with a $1,000,000 loan and bought one with a $700,000 loan, the $300,000 of debt you shed is mortgage boot and it is taxable — even though no cash ever reached your hands, and even if you spent every dollar of proceeds on the purchase. Boot does not kill the exchange. It just carves a taxable slice out of it, and it tends to be discovered in April rather than at closing.

Two kinds of boot

Cash boot is net cash or other non-like-kind property you receive. The obvious version is proceeds you deliberately pull out of the closing. The less obvious versions are the ones that catch people: exchange funds used to pay costs that are not legitimate transaction expenses, a seller credit structured the wrong way, or prorated items such as security deposits and rent that get handled as cash to you rather than as adjustments on the replacement side.

Mortgage boot, also called debt relief, is the net reduction in liabilities from the relinquished property to the replacement property. You are relieved of a mortgage when you sell; if you do not take on at least as much debt on the replacement, the difference is treated as value you received.

The logic is consistent once you see it: an exchange defers gain only to the extent you stay fully invested. Cash out and debt shed are both ways of getting value out of the deal, so the code treats them the same way.

The arithmetic

Take an owner selling a Central Texas retail building:

	Relinquished	Replacement A	Replacement B
Purchase / sale price	$3,000,000	$3,000,000	$2,600,000
Debt	$1,800,000	$1,800,000	$1,300,000
Equity reinvested	$1,200,000	$1,200,000	$1,200,000
Cash boot	—	$0	$0
Mortgage boot	—	$0	$500,000
Result	—	Full deferral	$500,000 recognized

In scenario B the owner reinvested every dollar of equity and still recognized half a million dollars of gain, because they bought a cheaper building with a smaller loan. There is no cash sitting anywhere to pay the resulting tax. That is the whole problem with mortgage boot: it produces a tax liability and no liquidity to meet it.

The netting rules, including the one that is asymmetric

Cash and debt offset each other, but not in every direction. The rules that matter in practice:

You do this	Does it offset cash boot received?	Does it offset mortgage boot received?
Add cash out of pocket to the replacement purchase	Yes	Yes
Take on more debt on the replacement property	No	Yes

Read the bottom-left cell twice, because it is the one that costs money. Borrowing more does not cure cash you already took out. An owner who pulls $200,000 at the sale closing and then, on advice that sounds sensible, borrows an extra $200,000 on the replacement property has not fixed anything — the $200,000 of cash boot is still taxable, and they now carry more debt. The only cure for cash boot is not taking the cash.

Cash added, by contrast, is a universal solvent. The owner in scenario B above who writes a $500,000 check into the replacement closing eliminates the mortgage boot entirely.

Deliberate boot is a strategy; accidental boot is a surprise

Nothing here says you must achieve total deferral. Boot is taxable only up to your realized gain, and everything above that keeps deferring, so a partial exchange is a legitimate and common choice. An owner who needs liquidity — to pay down other debt, to fund a capital reserve, to take chips off the table after a long hold — can take it as boot, pay tax on that piece, and defer the rest. Done knowingly, with the tax modeled in advance, that is just financing.

The failure mode is arriving at it by accident: trading down in price because nothing else penciled inside the 45-day window, or replacing an amortized loan with a smaller one because the new asset would not support the same leverage at today’s rates. Both are common right now, and both show up as boot.

Where mortgage boot actually comes from in this market

Three recurring sources in Central Texas exchanges:

Trading down under time pressure. The 45-day clock pushes owners toward whatever is available rather than whatever is equivalent. A smaller replacement means less debt. The answer is to start the replacement search before the disposition, not after — see finding replacement property in 45 days.

Debt capacity that shrank. A property bought years ago at a low rate may have carried 65% leverage; the same debt service coverage at today’s rates might only support 55% on the replacement. Same equity, less debt, mortgage boot. Model the replacement loan early — by day 90 at the latest — not at the end.

All-cash replacement. Owners who sell a leveraged property and buy an unleveraged one, often deliberately to eliminate debt, create mortgage boot equal to the entire loan they paid off. This is sometimes the right life decision and almost always a taxable one. Know the number before you commit.

Practical guardrails

Give your qualified intermediary and CPA the closing statement from the relinquished sale and a draft settlement statement for the replacement before the replacement closes, not after. Ask one question explicitly: what is my net boot on this structure, and what is the tax on it? If the answer is a number you do not like, the levers are to add cash, increase the replacement loan (for mortgage boot only), or buy more property. All three have to happen before closing; none can be fixed afterward.

And watch the closing statement itself. Using exchange funds to pay non-transaction items — prepaid insurance, loan reserve escrows, a repair credit handled as cash — can create boot out of what looks like ordinary deal plumbing. Legitimate transaction costs such as brokerage commissions, title fees and recording charges generally can be paid from exchange proceeds; your intermediary will tell you which line items are which.

How SCORE helps

Steven Owen is an Austin commercial real estate Agent who underwrites the replacement side against the debt you are giving up, not just the price you are giving up. SCORE models value and debt replacement together before you go under contract, sizes the replacement loan early enough to matter, and works with your qualified intermediary and CPA so boot is a decision rather than a discovery. See 1031 exchange services and buyer representation.

Know your boot before you close, not in April.

Send us the relinquished property’s price and loan balance. We’ll show you what the replacement has to look like — in both value and debt — to defer everything.

Talk to Steven 1031 services

This article is general information for commercial real estate owners and investors, not tax or legal advice. Section 1031 is federal tax law and its application depends on facts specific to you and your property. Before starting an exchange, engage a qualified intermediary and confirm treatment with your CPA or tax counsel — SCORE Property Group and Steven Owen are real estate professionals, not tax advisors, and do not act as a qualified intermediary. Authorities referenced: Internal Revenue Code §1031 as amended by the Tax Cuts and Jobs Act (real property only, effective 2018) and left unchanged by the One Big Beautiful Bill Act signed July 4, 2025; Treas. Reg. §1.1031(k)-1; Rev. Proc. 2000-37; Rev. Rul. 2004-86; IRS Form 8824. Verified as of September 25, 2026. Related: How a 1031 exchange works in Texas · The 45-day and 180-day deadlines · DSTs and NNN as replacement property · Finding replacement property in 45 days.