Boot — Where 1031 Exchanges Leak Tax Without Anyone Noticing

Boot is the gap between a full deferral and the tax bill that surprises you in April. It comes in three flavors, and each has a standard fix — worth reading alongside the main 1031 guide before your sale contract is final.

Cash boot: the obvious one

Any exchange proceeds you receive rather than reinvest — a distribution at either closing, or simply buying cheaper than you sold. Sell at $1.5M, buy at $1.35M, and that $150K difference is taxable gain even though you never saw a check. Fix: buy equal or greater, or choose the boot deliberately and budget its tax.

Mortgage boot: the sneaky one

Retire $700K of debt on the sale but take only $500K on the purchase and you’ve received $200K of debt relief — taxable exactly like cash, despite zero dollars arriving anywhere. This is the boot that catches sophisticated people, especially when replacement lenders offer better leverage than the old loan. Fix: match or exceed the retired debt, or contribute fresh cash equal to the shortfall (cash added offsets debt relief dollar-for-dollar).

Transactional boot: the death-by-papercuts one

Non-qualifying items settled from exchange funds: repair credits converted to cash, prorated rents netted to you, certain fees paid from proceeds, personal property bundled into the deal (furniture, equipment — not real property since 2018). Individually small, collectively real. Fix: route credits as price adjustments instead of cash where possible, pay non-exchange items from outside funds, and have your QI review the settlement statements on both closings before they finalize — theirs is the eye trained for exactly this.

The pre-contract habit

Every clean exchange we see shares one habit: the equal-or-greater math (price, equity, debt) is computed before the replacement offer goes out, not discovered at the closing table. Two minutes with the cap rate calculator and your debt schedule beats any amount of April cleverness.