Understanding “Boot” and Partial Exchanges in a 1031 Exchange

A 1031 exchange lets real estate investors defer capital gains taxes by reinvesting proceeds from a sale into another like-kind property. But what happens if you don’t reinvest all of the proceeds? That’s where the concept of “boot” comes in.

 What Is “Boot”?

“Boot” refers to any cash or non-like-kind property you receive during a 1031 exchange. Essentially, it’s anything that isn’t reinvested into your new property — such as leftover cash, mortgage relief, or personal property included in the deal.

For example:

If you sell a property for $1,000,000 and only reinvest $900,000 into the new property, the $100,000 difference is considered boot — and it becomes taxable.

 Tax Implications

Boot is taxed as capital gains, reducing the total amount of gain that can be deferred under Section 1031. The IRS treats it as if you received part of your profit in cash. Even if your overall exchange qualifies, you’ll still pay taxes on that portion.

 Partial Exchanges

A “partial exchange” occurs when part of the proceeds is reinvested (tax-deferred) and part is received as boot (taxable). Many investors do this strategically — for instance, to access some liquidity while still deferring most of their gains.

 The Bottom Line

To maximize tax deferral, reinvest all exchange proceeds and match or exceed your previous property’s debt. But if you need some cash flexibility, a partial exchange can still make sense — just understand that any boot received will trigger immediate tax liability.

 Thinking of starting a 1031 exchange? Don’t wait until it’s too late—contact us today to ensure your transaction is set up for success.

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Missed the 180-Day Rule? Here’s What Happens in a 1031 Exchange