‘Boot’ in a 1031 Exchange: How to Minimize Tax Implications

In the context of a 1031 exchange, “boot” refers to the portion of a transaction that doesn’t meet the tax-free criteria and thus becomes subject to immediate capital gains tax. Forms of boot might include cash proceeds, mortgage reduction and non-transaction costs. Although boot won’t disqualify a 1031 exchange, understanding its implications is crucial for optimizing tax benefits and preventing unnecessary liabilities.

Types of boot in 1031 exchanges

Cash boot occurs when an investor doesn’t reinvest all the proceeds from the sale of their relinquished property into a replacement property. For instance, if an investor sells a property for $450,000 and reinvests only $400,000 into a replacement property, the remaining $50,000 is considered boot. This will trigger a taxable event on the $50,000 of boot, undermining the primary purpose for most investors completing a 1031 exchange — to defer all of their capital gains tax.

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