Partial 1031 Exchange Boot: How to Calculate the Taxable Part
In a partial 1031 exchange, boot is the taxable slice: the cash you take out, any note you receive, and any drop in debt you do not replace. To estimate it, add cash boot to net mortgage boot; you are taxed on the smaller of that total and your realized gain, and the rest of the gain stays deferred in the replacement property. On a depreciated building, that taxed slice usually lands first in the unrecaptured §1250 layer, taxed at up to 25% federally, plus the 3.8% net investment income tax and state tax.
This page is the explanation behind our 1031 boot calculator: the formula, the netting rules, how boot is taxed by layer, and how to reduce or spread it. The tables below walk through the same math by hand, and the installment sale calculator will show what spreading the boot over a note does.
How to use it
You need six numbers from the relinquished (sold) property and the replacement:
| Input | Where to find it |
|---|---|
| Sale price of the old property, less selling costs | Closing statement |
| Adjusted basis of the old property | Depreciation schedule and purchase records (and any prior Form 8824) |
| Loan paid off on the old property | Payoff statement |
| Price of the replacement property | Purchase contract |
| New loan on the replacement | Loan documents |
| Cash you add at closing, and cash you take out | Closing statements; exchange agreement |
The math, in order:
- Realized gain = net sale price minus adjusted basis.
- Cash boot = cash (and other non-like-kind property, including personal property that goes with the building) you receive.
- Mortgage boot = old loan relieved minus new loan taken on minus cash you add, but not below zero.
- Total boot = cash boot + mortgage boot.
- Recognized gain = the smaller of total boot and realized gain (§1031(b)).
- Deferred gain = realized gain minus recognized gain. It carries into the replacement's basis (§1031(d)).
Cash boot vs mortgage boot (netting rules)
The exchange regulations net liabilities in a specific, one-directional way. Reg. §1.1031(d)-2, Example 2(c): "Although consideration received in the form of cash or other property is not offset by consideration given in the form of an assumption of liabilities or a receipt of property subject to a liability, consideration given in the form of cash or other property is offset against consideration received in the form of an assumption of liabilities."
In plain terms:
| You... | Does it offset debt relief? | Does it offset cash you receive? |
|---|---|---|
| Take on a new loan on the replacement | Yes | No |
| Add your own cash to the purchase | Yes | Generally no: cash taken out at the sale is boot even if you add cash to the replacement later |
| Take cash out at closing | It is cash boot | It is cash boot |
Simple example, three versions of one sale. You sell for $2,000,000 net with a $600,000 loan paid off.
| Scenario | New loan | Cash you add | Cash you take out | Cash boot | Mortgage boot | Total boot |
|---|---|---|---|---|---|---|
| A. Buy $1,800,000, new loan $400,000 | $400,000 | $0 | $0 | $0 | $200,000 | $200,000 |
| B. Buy $2,000,000 with the $400,000 loan plus $200,000 of your own cash | $400,000 | $200,000 | $0 | $0 | $0 | $0 |
| C. Buy $2,000,000 with a $900,000 loan, take $300,000 out | $900,000 | $0 | $300,000 | $300,000 | $0 | $300,000 |
Scenario C is the trap. The bigger new loan more than replaces the old one, but it does not cancel the $300,000 of cash you received. Borrowing more on the replacement never fixes cash boot.
How boot is taxed (recapture first)
Recognized boot gain is taxed like gain on a sale, in layers. What matters is the character of the gain you recognize:
| Layer | Federal rate | What to know in an exchange |
|---|---|---|
| §1245 recapture (personal property, cost-segregated 5 and 7-year parts) | Ordinary, up to 37% | Taxed to the extent of recognized gain, and also when §1245(b)(4) applies, even with zero boot, if the replacement has less §1245 property than you gave up |
| Unrecaptured §1250 gain (straight-line building depreciation) | Up to 25% | On a depreciated building, recognized gain is generally treated as this layer first on the Schedule D worksheet |
| Long-term capital gain | 0%, 15%, 20% | What is left after the layers above |
| Net investment income tax | 3.8% above $250,000 of modified AGI (joint) | Applies to boot gain on rental property for most owners |
| State | Varies; California taxes all gain as ordinary income | California also tracks deferred gain on out-of-state replacements (Form 3840) |
Two exchange-specific traps. Personal property is not like-kind since 2018 (Reg. §1.1031(a)-3), so the price allocated to appliances or furniture is taxed as a separate sale, usually §1245 recapture. And §1245(b)(4) limits §1245 recapture in an exchange to recognized gain plus the value of non-§1245 like-kind property acquired, so trading a cost-segregated building for property with fewer short-life parts can trigger recapture with no boot at all. Our companion piece on depreciation recapture in a 1031 exchange goes through it.
Example: trade-down with $400k boot
Simple example. You sell a rental for $2,000,000 (ignore selling costs), no loan. You paid $900,000 and took $400,000 of straight-line building depreciation, so your adjusted basis is $500,000. You buy a $1,600,000 replacement with no loan and keep $400,000.
| Step | Amount |
|---|---|
| Realized gain ($2,000,000 - $500,000) | $1,500,000 |
| Cash boot | $400,000 |
| Mortgage boot | $0 |
| Recognized gain (smaller of $400,000 and $1,500,000) | $400,000 |
| Deferred gain, carried into the replacement | $1,100,000 |
| Replacement basis ($1,600,000 - $1,100,000) | $500,000 |
| Character: unrecaptured §1250 gain (you have $400,000 of it) | $400,000 |
Federal ceiling on that $400,000: 25% + 3.8% = 28.8%, or up to $115,200 (simple example). In California, add up to 13.3%, which is why boot there can cost about 42 cents on the dollar at the top: see 1031 boot.
The 3.8% line alone, simple example. A couple with $150,000 of other modified AGI takes the $400,000 as cash in one year: modified AGI is $550,000, and net investment income tax applies to $300,000 (the part above $250,000), or $11,400. Take the same $400,000 as an installment note paid $80,000 a year for five years: modified AGI is $230,000 each year, under the $250,000 line, and the net investment income tax on the boot is $0 in every year. (The note's interest also counts toward the line; this example leaves it out.)
Ways to reduce or spread boot
1. Buy up, or buy equal. Replacement value and debt at least equal to what you gave up, with all cash reinvested, leaves no boot. Identifying several properties (up to three of any value, or more under the 200% or 95% rules, Reg. §1.1031(k)-1(c)(4)) helps on a trade-down.
2. Add cash to cure mortgage boot. Cash you put in offsets debt relief (Reg. §1.1031(d)-2, Ex. 2). It generally does not cure cash you take out at the sale.
3. Refinance after, not before. A cash-out loan on the old property just before the exchange, or one arranged as part of it, risks being treated as boot under the step-transaction doctrine, and no rule sets a safe waiting period. A new loan on the replacement after the exchange closes is the cleaner path; confirm timing with exchange counsel.
4. Take the boot as an installment note. A note received as boot is reported on the installment method, with the like-kind property excluded from contract price and payments and gross profit reduced by the deferred gain (§453(f)(6)). The result is a gross profit percentage near 100%: in the example above, each dollar of principal carries a dollar of gain. The Form 8824 instructions send this computation to Form 6252. Two ways to do it:
- The buyer's note. A note from the buyer received through the qualified intermediary is treated as the buyer's own note (Reg. §1.1031(k)-1(j)(2)(iii)). You carry the buyer's credit.
- A structured installment sale of the boot. The buyer pays in full; the boot slice is written into the purchase contract and paid at closing directly to an assignment company, usually funded by a fixed annuity the assignment company owns, never through the intermediary. You are the assignment company's unsecured creditor, the payment schedule is locked (no acceleration, pledging or changes), the commission is built into the pricing, and no IRS ruling specifically approves the structure; it relies on the general installment rules. Reg. §1.1031(k)-1(j)(2)(iii) covers only the buyer's own note, so the carve-out must be done precisely (see our structured installment sale guide).
Either way, it must be set up before the relinquished property closes. Cash that sits with the intermediary and is released to you later is a cash payment in the year released; it cannot be put into a note afterward. The full mechanics are in installment sale and 1031 boot, and the base rules in the installment sale guide.
5. Meet the boot with losses. Boot gain on a rental is passive income for most owners. Stuck passive losses, or new depreciation on a leveraged replacement (basis funded by new debt or cash is treated as newly placed in service, Reg. §1.168(i)-6(d)(1)), can offset it. That is the core idea of The Waterfall Strategy, free as a book.
Assumptions and limits
The calculator, and the examples here, simplify on purpose:
- Federal rates are shown as ceilings. Your actual rates depend on your other income. The 25% layer is a maximum, not a flat rate.
- Recognized gain is assumed to be unrecaptured §1250 gain first on a depreciated building, then long-term capital gain. Cost-segregated property, personal property and §1245(b)(4) need an asset-by-asset review.
- Exchange expenses paid from exchange funds can change the numbers, and closing costs that are not transaction costs can create boot.
- Related-party exchanges carry a two-year holding rule (§1031(f)), and dealer property does not qualify.
- State tax is not modeled in detail. California taxes all gain as ordinary income and follows the deferred gain into other states.
- It is an estimate, not a return. Form 8824 and your CPA decide the real answer. See the line-by-line Form 8824 instructions.
Bottom line
Boot is cash out plus net debt relief, taxed up to your realized gain. New debt can offset old debt but never cash you receive; cash you add offsets debt relief but generally not cash you took out. Taxed boot usually lands first in the 25% building-depreciation layer. If some boot is unavoidable, deciding before closing to take it as an installment note can spread it over years and keep more of it in lower brackets.
Questions to ask your CPA
- What is my adjusted basis, including any prior exchange shown on an old Form 8824?
- How much of the recognized gain is §1245 recapture, unrecaptured §1250 gain and capital gain?
- Does the replacement have enough §1245 property to avoid §1245(b)(4) recapture?
- Can I cure mortgage boot with added cash, and is any planned refinance too close to the exchange?
- Should unavoidable boot be taken as a buyer's note or a structured installment note, and will my intermediary allow a carve-out at closing?
- What does spreading the boot do to my brackets, the 3.8% tax and my state tax?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.