Why Does "Boot" Matter In A 1031 Exchange?

When you’re conducting your 1031 exchange, you may have someone ask you about “boot.” No, they are not discussing footwear. They are actually asking about any cash or value you receive from the transaction that may incur immediate tax liability.

Of course, like most things with the IRS code, you won’t find the word “boot” anywhere in Section 1031 – or anywhere else for that matter. Yet it is a concept you must understand, or else face unexpected tax consequences.

“Boot” is any value the investor receives that is over and above the value of the relinquished property once the 1031 transactions are completed. Boot can come in the form of money, debt relief or the fair market value of other property received by the investor in an exchange.

Money – This includes any cash (or cash equivalents) received by the investor.

Other Property – This encompasses any property received that is not “like kind.” For example, personal property received in exchange for real property, non-qualifying replacement property, real property used for personal purposes, or any sort of seller financing.

Debt Relief – This is the value of any debt reduction achieved when replacement property is acquired.

Any “boot” received in a 1031 exchange is subject to immediate tax.

Avoiding “boot” in a 1031 exchange is not difficult. It simply requires an investor to acquire replacement property that is equal to or greater in value than the relinquished property. To avoid “boot” and the subsequent tax implications, an investor should avoid “trading down” with the replacement property.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website