What is Boot?
“Boot” refers to any portion of a 1031 exchange that does not meet the like-kind replacement property criteria. Most commonly this is in the form of “cash boot” and “mortgage/debt boot.”
Cash boot occurs when an investor has uninvested proceeds from the sale of a replacement property. If they intend to do a 1031 exchange but do not replace all of the cash received from the sale, they will owe tax on the uninvested portion.
If an investor sells an investment property for $1,000,000 and they purchase a replacement property for $750,000, they will have a $250,000 cash boot that will be subject to tax.
Mortgage/debt boot occurs when the mortgage value on the replacement property is less than the mortgage on the relinquished property. It is important to consider this when doing a 1031 exchange as both the cash received AND the debt need to be replaced in the acquired property.
An investor sells an investment property with a $500,000 mortgage and purchases a replacement property utilizing a $400,000 mortgage. This investor will be subject to tax on a mortgage boot in the amount of $100,000. It is important to note that this boot can be offset by adding $100,000 of cash to the exchange.
The easiest way to avoid a “boot” issue is to remember that you are replacing the total real estate value in a 1031 exchange. Both the equity and debt from the relinquished property need to be equal or greater in the replacement property.