Short answer: Boot is taxed as recognized gain, up to the total gain you realized on the sale. It's taxed first as unrecaptured §1250 gain at up to 25% to the extent of prior depreciation, then as long-term capital gain at 0%, 15% or 20%, plus the 3.8% net investment income tax where it applies and any state tax.
Reviewed by Jon Hilley. Last updated September 29, 2026.
Anything you receive in a 1031 exchange that isn't like-kind real property is boot: cash you keep, debt that's paid off and not replaced, and other property. You pay tax on the boot, up to the amount of gain you realized, and you still defer the rest. An exchange with some boot is a partial exchange, not a failed one. Our guide to boot in a 1031 exchange covers the full picture.
Once gain is recognized, its character matters. For rental property, recognized gain is taxed first as unrecaptured §1250 gain at up to 25% to the extent of the depreciation you've taken, then as long-term capital gain, plus the 3.8% net investment income tax where it applies and state tax.
Key rules
- Gain recognized up to boot: you recognize gain equal to the smaller of your realized gain or the cash and other non-like-kind property you receive (IRC §1031(b))
- Debt relief is boot: a mortgage paid off on the property you sell counts as cash received, unless it's offset by debt on the replacement or cash you add (Treas. Reg. §1.1031(d)-2)
- New debt doesn't offset cash out: taking on a bigger loan on the replacement property does not cancel cash boot you received (Treas. Reg. §1.1031(d)-2)
- Depreciation portion taxed at up to 25%: recognized gain attributable to straight-line depreciation on real property is unrecaptured §1250 gain (IRC §1(h)(6))
- Net investment income tax: recognized gain can also be subject to the 3.8% tax (IRC §1411)
- No losses: receiving boot can't produce a deductible loss in an exchange (IRC §1031(c))
What counts as boot?
Cash boot
Cash boot is exchange money that ends up with you instead of in replacement property. That includes cash you take at the sale closing, funds the QI returns after you buy, and exchange funds used for costs that aren't transaction costs, such as loan fees, prorated rents, security deposits or repairs, which can create boot.
Mortgage boot
If you sell with a $300,000 loan and buy with a $250,000 loan, your net debt dropped by $50,000. That $50,000 is treated like cash you received unless you add $50,000 of your own cash at the purchase.
Other property
Since 2018, only real property qualifies for a 1031 exchange. If you receive furniture, equipment, a note from the buyer or other non-real property as part of the deal, its value is boot.
How is boot taxed?
Recognized gain from boot is taxed the way the gain would have been taxed in an ordinary sale. For rental property, that usually means:
- Unrecaptured §1250 gain first: up to the amount of depreciation you've claimed, at a maximum 25% federal rate.
- Long-term capital gain next: at 0%, 15% or 20% depending on your income.
- Net investment income tax: 3.8% on top if your income is above the thresholds.
- State income tax: depending on where the property is and where you live.
These rates assume you held the property you sold for more than a year. If you held it for a year or less, the recognized gain is short-term and taxed at ordinary income rates.
If you used cost segregation to split out components such as appliances, carpet or fixtures, those items aren't real property after 2017. Giving them up without receiving similar property can trigger §1245 recapture taxed as ordinary income (IRC §1245(b)(4)). Model this with your CPA before you sign a contract.
Exchange expenses help. Commissions, title and escrow fees and the QI fee paid from the proceeds generally reduce your amount realized and offset cash boot on Form 8824, line 15.
Example: $50,000 of cash boot
- Sale price: $1,000,000
- Selling costs (commissions, title, QI fee): $50,000
- Amount realized: $950,000
- Adjusted basis ($650,000 cost minus $200,000 depreciation): $450,000
- Realized gain: $500,000
- Mortgage paid off at closing: $300,000
- Net proceeds held by the QI: $650,000
- Replacement property price: $900,000, bought with a $300,000 new loan and $600,000 of exchange funds
- Cash returned to you: $50,000
- Recognized gain (smaller of $500,000 or $50,000): $50,000
- Federal tax on the boot: $14,400 ($50,000 × 25% = $12,500, plus $50,000 × 3.8% = $1,900)
- Deferred gain: $450,000
- Basis of the replacement property ($900,000 minus $450,000): $450,000
Assumptions: all $50,000 is taxed as unrecaptured §1250 gain at 25% because prior depreciation ($200,000) exceeds the boot, and the 3.8% net investment income tax applies; state tax not included. Debt relieved ($300,000) equals new debt ($300,000), so there's no mortgage boot.
The same $50,000 of boot would arise if you instead reinvested all $650,000 but took only a $250,000 loan: $300,000 of debt relieved minus $250,000 of new debt leaves $50,000 of mortgage boot. To run your own numbers, use our 1031 exchange boot calculator.
Other questions investors ask
How do you avoid boot in a 1031 exchange?
Buy replacement property that costs at least as much as your net sale price, reinvest all of the net proceeds held by your QI, and replace any mortgage you paid off with new debt or added cash. Pay loan fees and other non-closing costs with outside money rather than exchange funds.
When should you not do a 1031 exchange?
When you'd take out so much boot that little gain is deferred, when you're selling at a loss (a 1031 exchange can't recognize a loss), or when you want to leave real estate altogether. Compare the options in What can you do instead of a 1031 exchange?
Common mistakes
- Paying down debt instead of replacing it: We see investors buy a replacement with less leverage than they sold, not realizing the debt reduction is taxable unless they add cash.
- Taking cash at closing to cover something: Once proceeds reach your account, that cash is boot, and borrowing more on the replacement won't offset it.
- Paying loan costs from exchange funds: Lender fees and similar financing costs paid from the exchange account can be boot. Paying them with outside cash avoids the problem.
- Assuming boot is taxed at 15%: The depreciation portion is taxed at up to 25%, which often surprises investors who expected capital gains rates on the whole amount.
Run the numbers: try our free Partial 1031 (Boot) Calculator.
