Mortgage Boot (and Cash Boot)
Boot is value received in a 1031 exchange that is not like-kind property, and it is taxable. Mortgage boot arises when the replacement property carries less debt than the relinquished property — the debt reduction is treated as taxable gain even if no cash changes hands. Cash boot arises when net equity proceeds are not fully reinvested. Full deferral requires both equal-or-greater debt and 100% reinvestment of equity.
Key Points¶
- Example: $8M old debt vs. $6M new debt = $2M mortgage boot, taxable at capital-gains rates.
- To avoid boot, NNN loans must collectively equal or exceed the retired apartment loans.
- This can force more leverage on the NNN purchases than the group might otherwise prefer.
- Cash boot: any unreinvested equity is also taxable.