Boot refers to any value an investor receives in a 1031 exchange that is not like-kind real property, such as cash left over after the replacement property is purchased, or debt relief that results from the replacement property carrying less mortgage debt than the property sold. Receiving boot does not disqualify the exchange entirely, but it does trigger recognition of taxable gain up to the amount of the boot received, which partially offsets the deferral the investor was otherwise trying to achieve.
Boot commonly appears when an investor trades down in value or equity, deliberately or unintentionally, between the relinquished and replacement properties, or when exchange funds are used for something other than qualifying real estate costs. Careful planning around purchase price, financing, and closing costs can minimize or eliminate boot in most transactions. Investors working through a 1031 exchange for the first time often find that understanding boot mechanics, as covered in this 1031 exchange guide, prevents unexpected tax bills at closing.
Further reading: Understanding 1031 Exchanges: A Guide for Accredited Real Estate Investors
Watch: Lightstone DIRECT’s Jonathan Spitz on Why Now Is a Good Time to Invest (Short)
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