Boot in a 1031 Exchange: What It Is and How It's Taxed

How Boot Gets Taxed

The common mortgage-boot surprise: you sell a property with a $600k loan and buy one with a $450k loan. That $150k of debt relief is boot even though you never touched cash. Replace the debt — with new financing or fresh cash — and the boot disappears.

• Gain is recognized to the extent of boot received — but never more than your actual realized gain (IRC 1031(b))
• Ordering matters: recognized gain is treated as depreciation recapture first (unrecaptured Section 1250 gain, taxed up to 25%), then capital gain
• Texas sellers keep a break: no state income tax on the boot. California sellers get tracked — the FTB requires annual Form 3840 reporting on deferred gains

Does taking some cash out kill my 1031?

No. A partial exchange is fine — the cash you take is taxed, the rest stays deferred. Decide the split before closing so the QI documents it cleanly.

How do I avoid boot completely?

Two conditions: buy equal or greater value than your net selling price, and move all your equity into the new property. Miss either and the shortfall is boot.

Is boot taxed at capital gains rates?

Not entirely. Depreciation recapture comes out first at up to 25%, and only the remainder gets capital gains treatment.