1031 Exchange Boot

The governing rule is one sentence: you recognise the lesser of your realised gain or the net boot you received. Boot can never make you report more than you actually made, and gain is never deferred past the boot you took.

Most sellers meet boot for the first time on a return, in March, months after the exchange closed and long after anything could have been done about it.

Run your own numbers in the 1031 calculator → It computes your boot both ways, splits it into the buckets below, and shows what each fix is actually worth.

Go deeper: a full analysis of cash boot and mortgage boot in a 1031 exchange on Big Sale Tax.

The two kinds

Cash boot is money. Cash taken at the closing table, or (far more often) proceeds the qualified intermediary could not spend because the replacement property cost less than the one you sold. Unspent money sitting at the QI on day 181 is cash boot whether you intended it or not.

Mortgage boot is debt relief: debt paid off or assumed at closing on the property you sell, to the extent the replacement does not carry as much. You carried a $1.4M loan, paid off at closing; the replacement carries $400k. You were released from $1M of obligation. Being relieved of debt counts as receiving value, so it is boot, even though no money moved.

The netting rule only works one way

This is where experienced investors still get hurt.

• Cash you bring from outside the exchange does offset mortgage boot, dollar for dollar
• Exchange expenses (commission, escrow, title, the QI fee) do reduce boot
• New debt on the replacement does NOT offset cash you received

Pocket $100,000 at closing while taking on $200,000 more debt than you shed, and it feels like the extra debt should cover it. It does not. The whole $100,000 is taxable. Cash boot and mortgage boot net separately, and the traffic runs in only one direction.

Boot is taxed worst-first

Recognised gain is not taxed at a single rate. It fills three buckets, starting with the most expensive:

1. §1245 depreciation recapture: ordinary income, up to 37% federal
2. Unrecaptured §1250 gain: up to 25%, under §1(h)(1)(E)
3. Long-term capital gain: 0/15/20%, plus 3.8% NIIT

A modest boot on a heavily cost-segregated building can be entirely ordinary income. The first dollars out are always the expensive ones.

The phantom tax bill

This is the problem nobody warns about, and it is the most common one.

A seller trades down, sheds debt, and reinvests every single dollar. Nothing comes home. On a real set of numbers ($3M sale, $180,000 of selling costs, a $1.4M loan paid off at closing, into a $2.6M replacement carrying only $400k, with $780,000 of his own cash added, which offsets that much of the debt relief), it looks like this:

He did everything right. He reinvested all of it. He owes $81,963, payable in April, out of his own savings, on a transaction where he never touched a dollar.

That is phantom income, and debt relief is the most reliable way to create it.

See whether your exchange throws one →. The calculator puts cash received and tax owed side by side, which is the only comparison that matters here.

The dollar examples on this page were run on the FTB 2025 California rate schedule. The calculators on this site now use the 2026 schedule (FTB Tax News, October 2026), so a rerun today gives slightly different numbers.

The suspended losses you may already have

Here is the part most explanations get backwards.

A §1031 exchange is not a fully taxable disposition, so §469(g)(1) does not release your suspended passive losses. They do not free up. They carry over and attach to the replacement property.

But recognised boot is passive activity income, so the suspended losses from that activity can be deducted against it.

In the case above, $500,000 of suspended passive losses absorbed the entire $220,000 of boot. The $81,963 bill went to zero, and $280,000 of losses carried forward to the replacement. Losses that had been sitting on the return for years doing nothing.

Anyone who has owned a rental through a few bad years should check this before assuming the boot is unavoidable. Enter your suspended loss balance → and the calculator applies it to the most expensive layer first.

Why a note usually will not save you

The instinct is to take the boot as seller financing and spread it over years. It rarely works, for two reasons.

§453(i) recognises depreciation recapture in full in the year of sale, even on the installment method. The ordinary slice cannot move. A note only ever reaches the 25% and long-term layers.

The 25% layer is a ceiling, and high earners hit it every year. For a seller with large other income, twenty-five percent in year one is twenty-five percent in year ten. Spreading pays when the slices land lower: under the 3.8% NIIT line, below the 20% capital gain bracket, or lower in a state's brackets.

On a $420,000 boot that was mostly recapture, spreading it across ten years saved $2,343, or six tenths of one percent. On a $1.36M boot that was all long-term gain, the same structure saved $71,177. The difference is size and character, not cleverness. The calculator tells you which one you have, and says plainly when a note is not worth it.

Cost segregation makes it worse

A cost segregation study moves basis out of the 39-year shell into 5-, 7- and 15-year property. That converts future §1250 depreciation (25%, and eligible for installment treatment) into §1245, which is ordinary income and frozen into year one by §453(i).

Cost segregation saves real money while you hold the building and quietly damages the exit. It is often still the right call. It is never mentioned by the firm selling the study.

The calendar creates boot

The replacement must be received by the earlier of 180 days or your return due date including extensions. A closing on 20 November loses 34 days (the window snaps back to 15 April) unless Form 4868 is filed.

Add the identification rules (three properties, or any number within 200% of value, or 95% of what you identify must actually close) and sellers routinely get forced into trading down on day 46. The boot was created by the calendar, not by choice.

California keeps its claim forever

Deferred California-source gain stays California's when the replacement is out of state. FTB Form 3840 must be filed every year until that gain is recognised, including years you owe California nothing else, and after you have moved away. The FTB cross-references federal Form 8824 and issues notices automatically when the 3840 is missing.

What actually kills boot

A Delaware Statutory Trust. Under Rev. Rul. 2004-86 a Delaware statutory trust interest is treated as a direct interest in real property, so it qualifies as replacement property, and it does two jobs at once.

It absorbs leftover cash in any dollar amount, so there is no need to find a whole building that happens to cost the right number. And because most Delaware statutory trusts carry non-recourse debt, your share of that debt replaces the debt you shed, killing mortgage boot at the same time.

On the calculator's starting $3M deal (an $800,000 loan paid off and a $2.4M replacement carrying $600,000, so $220,000 of cash left over plus $200,000 of debt relief): $220,000 of equity into a 50%-leveraged Delaware statutory trust bought $440,000 of property carrying $220,000 of debt. Recognised boot went from $420,000 to zero, and $158,163 of tax went with it.

If you want to stay invested, the honest order is Delaware statutory trust first, suspended losses second, a note third, cash last. If you want part of the money out of real estate, the next section is for that part.

Model the Delaware statutory trust allocation →. Set how much of the leftover goes into the trust and at what leverage, and watch the recognised boot move.

Where a §453 installment sale actually belongs

On the cash you don't want to reinvest. If part of the price is leaving real estate anyway, a structured installment sale can take that cash boot and have it taxed as the payments arrive instead of in one year. It has to be set before closing: written into the purchase contract and the exchange agreement, and paid by escrow straight to the assignment company, never through the intermediary. Once the money is with the intermediary, it is too late.

Two limits, stated plainly. Debt-relief boot can't be put on a schedule: there is no cash in it. And §1245 recapture is taxed in the year of sale however the deal is paid (§453(i)). The trade-offs: the payments are fixed and can't be sped up, and a commission is built into the pricing.

A Delaware statutory trust and a structured sale answer different questions. The trust keeps the money in real estate and defers the tax, with no control for the life of the trust. A structured sale takes the cash part out, spreads its tax over years you choose, and leaves no tenants and no buyer to collect from. Many sellers use both: the trust for what stays invested, the structure for what is leaving.

Run your own numbers first. If the boot is small and mostly recapture, take the cash and stop reading. If the cash part is large, or you are tired of tenants, the structure is worth an hour.

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Run it on your own deal

The 1031 exchange calculator takes what you sold, what you are buying, and the debt on each side, then gives you:

• your cash boot and mortgage boot under the real netting rules
• the character split (§1245, §1250 and long-term), because that decides which fixes can help
• the phantom bill: tax owed against cash actually received
• what a Delaware statutory trust, your suspended losses, or an installment note each do to it, in dollars
• your true deadline, including the return-due-date trap that shortens a late-year exchange
• the California clawback warning if you are selling here and buying elsewhere

It is free, nothing is saved, and it will tell you to take the cash when that is the right answer.

Related: unrecaptured §1250 gain calculator · depreciation recapture calculator