If your exchange left you with leftover cash or debt relief — "boot" — that portion is taxable this year no matter how clean the rest of your 1031 was. A §453 structure can take that boot gain and spread it over years instead of taking it all at once.
"Boot" is any value you receive in a 1031 exchange that isn't like-kind real property — typically cash left over after the exchange, or a reduction in mortgage debt on the replacement property versus the relinquished one. The IRS taxes boot as gain in the year you receive it, even though the rest of your exchange is tax-deferred.
Exchangers often create boot without meaning to — buying a slightly smaller or less-leveraged replacement property is enough to trigger it, even when the overall exchange looks clean on paper.
A lot of exchangers plan the like-kind portion carefully and don't realize until tax season that the boot portion is fully taxable — no deferral, no spreading, right in the year of the exchange. On a large exchange, boot alone can be a six-figure gain landing in your highest bracket in a single year.
It's especially common when sellers deliberately trade down — taking some cash out while replacing only part of the value in the new property. That's a completely legitimate reason to accept boot, but it still comes with a same-year tax bill unless it's structured differently.
The installment sale method under IRC §453 — in the tax code for roughly 100 years — can be applied to structure the boot portion of your transaction so it isn't taken as a single lump sum. Instead of receiving that cash outright, the obligation is assigned to a licensed third party that funds an A-rated insurance-carrier annuity, paying you over a term you choose and taxing you only as each payment arrives.
Take $2M in boot taxed all at once: combined federal long-term capital gains (20%), the 3.8% NIIT, and California's rate up to 13.3% can add up to roughly $700K. Spread that same $2M over 10-15 years, and it can trend toward $500K in total tax — illustrative, not guaranteed, and dependent on your income and the term selected.
If any part of your boot gain relates to §1250 depreciation recapture, that portion is taxed at a flat 25% and comes out first — it cannot be spread across the installment term. Only the true capital gain above recapture benefits from spreading into lower brackets. And as with any §453 structure, this must be papered before you receive the boot — not after your exchange closes.
Structuring boot isn't something you do alone after the fact — it has to be built into the exchange plan while your QI is still holding funds and before any boot is disbursed to you. In practice that means:
Done right, the like-kind portion of your exchange proceeds exactly as planned, and only the boot gets redirected into a spread-tax structure instead of hitting you all at once.
No. The structure has to be arranged before you take receipt of the boot. Once the funds or debt relief have already passed to you, you're in constructive receipt and it's too late.
No. This applies specifically to the taxable boot portion — the like-kind deferral on the rest of the exchange is unaffected.
Both are taxable as gain in the year received, but structuring mortgage boot requires more advance planning since there's no literal cash to redirect. Talk with your CPA and a structuring specialist before your exchange closes.
It depends on setup costs versus tax saved, but boot gains in the low six figures and up are typically worth evaluating.
Your qualified intermediary, your CPA, and a structured sale specialist should all be looped in before your exchange closes — this is educational information, not tax or legal advice.
Plug in your sale price, basis, and state — the calculator runs your exact 2026 federal + California tax and shows what a Structured Installment Sale keeps in your pocket.
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Or talk it through: 213-340-2018 · Hans Goldstein · NPN 20602398. Educational only — not tax, legal, or accounting advice.
