1031 exchange boot calculator

What boot is

In a 1031 exchange, boot is any value you receive that is not like-kind real estate. The two kinds that matter most are cash boot, which is sale proceeds you take instead of reinvesting, and mortgage boot, which is debt on the property you sold that is paid off and not replaced. Boot does not disqualify an exchange, but it is taxable in the year of the sale, up to the gain you realized.

The rule of thumb is to buy equal or up: a replacement property worth at least the net sale price of the property you sold, with all of your exchange proceeds reinvested and the debt you paid off replaced by new debt, cash you add, or a mix of both. Fall short on either the value or the equity and the shortfall is boot.

How the math works

• Net equity is the sale price minus selling costs and the mortgage paid off at closing. That is the cash your qualified intermediary holds.
• Cash boot is any part of that equity not needed to buy the replacement property after its debt and the cash you add. If the purchase needs more cash than your equity, cash boot is zero and the calculator tells you how much you would add.
• Mortgage boot is the debt paid off minus the new debt, minus the fresh cash you put in. Cash you add offsets debt relief; new debt you take on does not offset cash you receive.
• Taxable amount is the total boot, capped at your total gain if you enter it. Gain beyond the boot stays deferred.

Exchange expenses, seller financing, personal property in the sale and the way your intermediary handles prorations can all shift these numbers. The calculator keeps the simplified version so you can see the shape of a deal quickly.

Worked example

You sell a rental for $1,000,000 with $60,000 of selling costs and a $400,000 mortgage, so $540,000 of equity goes to your intermediary. You identify a replacement at $900,000 with a $400,000 loan. The purchase needs $500,000 of cash, so $40,000 of your equity is left over: that is $40,000 of cash boot. Your debt is fully replaced, so there is no mortgage boot. If your total gain is $300,000, roughly $40,000 is taxable and $260,000 is deferred.

Buy at $1,100,000 with a $450,000 loan instead and the purchase needs $650,000 of cash: all of your equity is reinvested, you add $110,000, debt goes up, and the exchange is fully deferred.

How to avoid boot

• Reinvest all of the exchange proceeds. If one property does not use them all, add a second replacement, such as a DST interest sized to the leftover equity.
• Replace the debt you paid off with new debt, or add cash. Zero-coupon DSTs and leveraged DSTs exist largely to match debt.
• Decide in advance if you want cash out. A partial exchange is a legitimate choice; the calculator shows what it costs.
• Watch the small items: selling costs paid from proceeds, seller credits and personal property can all create boot on their own. The boot guide walks through them.

Questions

Is boot the same as a failed exchange?

No. Boot makes part of the gain taxable; the rest of the exchange still defers tax. An exchange fails when the deadlines or the like-kind rules are missed.

Does new debt offset cash I take out?

Generally not. Cash you add can offset debt relief, but borrowing more on the replacement does not shelter cash you receive.

Can I use fresh cash instead of exchange proceeds?

You can add cash, but exchange proceeds you do not reinvest are still boot. Adding cash reduces mortgage boot; it does not make leftover proceeds tax-free.

What about depreciation recapture?

Boot can be taxed as recaptured depreciation before it is taxed as capital gain. The recapture guide covers the order and the rates.

Related guides

• What is boot in a 1031 exchange? Cash, debt and tax examples
• Find boot before closing
• Boot, debt replacement and full deferral
• Debt replacement and mortgage boot: cash, loans and LTV
• Boot (glossary) · Mortgage boot (glossary)
• Identification rules: three properties, 200% and 95%
• Portfolio Builder: allocate exchange equity across current offerings

Have a deal you are weighing? Talk it through with Jerry.