What is boot, and how do I avoid paying tax on it?

Question

Turnrow Capital · Accepted Answer

Boot is anything you receive in an exchange that is not like-kind real estate — leftover cash, or debt relief you do not replace. Boot is taxable up to your total gain. To fully defer, buy replacement property of equal or greater value and reinvest all the equity.

Cash boot is the obvious kind: you sell for $1.2M and buy for $1M, so $200,000 comes back to you and is taxed. Mortgage boot is subtler — if the debt on your old property exceeded the debt plus new cash on the replacement, the difference is treated as money received, even though no check ever reached you.

Small, accidental boot is common: prorated rents credited to you at closing, earnest money refunded outside the exchange account, or seller credits handled sloppily. These create taxable slivers that annoy more than they hurt, but on a large sale they add up. Have your qualified intermediary and CPA review the settlement statement before closing, not after.

Note that boot does not blow up the exchange — it just gets taxed. Partial exchanges are legitimate. If you deliberately want $150,000 of the proceeds in hand, take it as boot, pay the tax on that slice, and defer the rest.