Mortgage Boot
Mortgage boot is the taxable gain created in a 1031 exchange when the debt on the replacement property is less than the debt paid off on the sold property.
Definition
Mortgage boot, also called debt-relief boot, arises in a 1031 exchange when you reduce your mortgage debt. The IRS treats being relieved of debt as if you received cash, so if your replacement property carries less debt than the property you sold, the difference is taxable.
Suppose you sell a property with a $500,000 mortgage and buy a replacement with only a $300,000 loan. The $200,000 of debt reduction is mortgage boot and is taxed as recognized gain, even if you reinvested all of your cash equity. You can offset mortgage boot by adding cash to the replacement purchase to cover the gap.
This is a common trap for investors who trade into a less-leveraged property. DSTs help avoid it by offering interests with built-in, pre-arranged debt at various loan-to-value ratios, letting an investor precisely match the debt they need to replace.
Key points
- Taxable gain from reducing mortgage debt in an exchange
- IRS treats debt relief as if it were cash received
- Can be offset by adding cash to the replacement purchase
- Avoided with DSTs that carry matching pre-arranged debt
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.