Not all boot is created equal. Cash boot and mortgage (debt-relief) boot arise from different parts of a 1031 exchange, and the way they net against each other determines your taxable amount. This guide compares the two and shows how to balance debt and equity to keep your exchange fully deferred.
General information only — not tax, legal, or financial advice. A 1031 exchange has strict, unforgiving deadlines and significant tax consequences. Work with a CPA and a qualified intermediary (QI) before you act. A REALTOR® cannot serve as your QI. Verify current IRS and California FTB rules with a licensed tax professional.
The two types side by side
| Cash boot | Mortgage boot | |
|---|---|---|
| Source | Net cash / non-like-kind property received | Reduction in debt (relinquished debt > replacement debt) |
| Do you touch cash? | Yes | Not necessarily |
| Taxable? | Yes, up to realized gain | Yes, up to realized gain |
| How to avoid | Reinvest all proceeds; take no cash out | Match or exceed old debt, or add cash |
How they offset
The netting rules matter:
- Adding cash offsets mortgage boot: if your replacement debt is lower than your old debt, contributing additional cash can cover the gap and eliminate mortgage boot.
- Extra debt does not offset cash boot: if you take cash out of the deal, you cannot erase that cash boot by simply borrowing more on the replacement property.
- Net debt and net equity are tested together to determine total taxable boot.
Worked example
You sell for $1,000,000 with $500,000 of debt, netting $500,000 of equity. Scenario A: you buy a $1,000,000 replacement with only $300,000 of debt but add $200,000 of your own new cash — your equity is $700,000 and debt is $300,000, totaling $1,000,000, so no boot. Scenario B: you buy the same property with $300,000 of debt and do NOT add cash — the $200,000 debt reduction is mortgage boot. Scenario C: you reinvest only $400,000 of equity and keep $100,000 — that $100,000 is cash boot, and increasing your loan will not offset it.
Practical rules of thumb
- Buy replacement property of equal or greater value.
- Reinvest all your net equity — do not skim cash.
- Replace debt with equal or greater debt, or substitute cash for the shortfall.
- Watch closing-statement credits that can quietly create boot.
Common ways boot sneaks in
- Taking a cash credit at closing for repairs.
- Paying non-exchange expenses out of exchange funds.
- Buying down the replacement mortgage below the old debt without adding cash.
- Receiving personal property bundled into the deal.
How Brian helps
Brian and your QI watch the closing statements on both sides so credits, prorations, and loan amounts do not create accidental boot, and he targets replacement properties priced and financed to keep your exchange fully deferred.
Frequently Asked Questions
How is mortgage boot different from cash boot?
Cash boot is net cash or non-like-kind property you receive; mortgage boot is the reduction in your debt when replacement debt is less than the debt you paid off. Both are taxable up to your gain.
Can extra debt offset cash boot?
No. Increasing replacement debt does not offset cash you take out. Cash boot is avoided only by reinvesting all proceeds.
Can adding cash offset mortgage boot?
Yes. Contributing additional cash to the replacement purchase can cover a debt shortfall and eliminate mortgage boot.
Are net debt and net equity tested together?
Yes. The total taxable boot is determined by evaluating your net equity and net debt across both properties together.
Can closing credits create boot?
Yes. Cash credits, repair allowances, and non-exchange expenses paid from exchange funds can all create boot, so review closing statements carefully.
Is this tax advice?
No. This is general educational information. Confirm your boot calculations with a CPA and qualified intermediary.
