Home / Investors / 1031 Exchange / Boot and Partial Exchanges

Boot in a 1031 Exchange: Cash, Mortgage Relief and Partial Exchanges

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

A partial 1031 exchange is one where you receive something besides like-kind real property, such as cash or relief from debt, and that extra value, called boot, is taxable up to the amount of your gain. The rest of the gain stays deferred. Boot comes in two main forms: cash boot, such as exchange money you keep, and mortgage boot, when the debt paid off on the property you sell exceeds the debt you take on with the replacement and you don’t add cash to make up the difference.

Partial exchanges are common among owners who want some money out of a sale, or who are trading a high-value Bay Area property for a less expensive one elsewhere. This page explains how the federal rules count boot, how the debt netting rules work, three hypothetical examples, and what California adds at escrow and afterward. For the overall framework, start with our 1031 exchange guide.

The basic rule: gain is taxed up to the boot

Internal Revenue Code section 1031(b) covers an exchange that would qualify except that you also receive “other property or money.” In that case gain is recognized, but in an amount not more than the money plus the fair market value of the other property received. Losses aren’t recognized.

Two limits work together. You never recognize more than your realized gain, and you never recognize more than the boot. The IRS Form 8824 instructions build this into the form: the recognized gain on line 20 is generally the smaller of the boot figure on line 15 or the realized gain on line 19, but not less than zero.

Outcome	What you receive	Tax now
Full deferral	Only like-kind real property, with no net debt relief	None on the exchange
Partial exchange	Like-kind property plus cash, other property or net debt relief	Gain recognized up to the boot
Taxable sale	Cash only, or a failed exchange	The entire gain

Cash boot: money you keep or receive

Cash boot is any money that comes to you out of the transaction rather than going into the replacement property. Typical sources:

Exchange funds the intermediary releases to you after the exchange because the replacement cost less than your net proceeds.
Cash you take at the sale closing instead of sending the full proceeds to the intermediary.
Non-like-kind property you receive, valued at its fair market value. Since 2018 only real property qualifies for like-kind treatment, so personal property received in the deal can be boot.

Exchange expenses help here. The Form 8824 instructions say to reduce the line 15 total, but not below zero, by the exchange expenses you incurred, and expenses not used that way are added to the basis of the property received. Ask your CPA which closing costs count as exchange expenses.

Timing also matters. As our guide to choosing a qualified intermediary explains, the deferred exchange regulations (Treasury Regulation 1.1031(k)-1(g)(6)) require the exchange agreement to limit your right to receive the funds before the exchange period ends, with narrow exceptions, so leftover money normally comes back to you only after the exchange is complete.

Mortgage boot and the netting rules

Section 1031(d) treats a liability of yours that another party assumes as money you received. Treasury Regulation 1.1031(d)-2 applies the same treatment when the property you transfer is subject to a liability, and it sets out how liabilities and cash offset one another.

Debt against debt. Liabilities you take on with the replacement property offset liabilities you are relieved of. Only net relief counts as boot.
Cash you add offsets debt relief. Cash or other property you give in the exchange offsets the liabilities you’re relieved of.
Debt you take on doesn’t offset cash you receive. Cash you receive stays boot even if you take on more debt than was paid off.

The Form 8824 instructions reflect the same rules. Line 15 includes the net liabilities assumed by the other party, measured as the excess of those liabilities over the liabilities you assume, the cash you pay and the value of other property you give up. Line 18 runs the calculation in the other direction.

The regulation’s own second example shows the third rule. A taxpayer was relieved of an $80,000 mortgage, took on a $150,000 mortgage and also received $40,000 in cash. Even though the taxpayer took on more debt than was relieved, the $40,000 of cash was recognized as gain.

Three hypothetical examples

These examples are illustrative only. To keep the arithmetic readable they ignore closing costs, exchange expenses, depreciation recapture and state tax, all of which change real results.

Example 1: trading down with cash left over

An owner sells a rental for $1,800,000. It has an adjusted basis of $700,000 and no mortgage, so the realized gain is $1,100,000. The intermediary holds $1,800,000, and the owner buys a replacement property for $1,500,000 with no loan. The remaining $300,000 is released after the exchange.

Boot: $300,000 cash.
Gain recognized: $300,000, the smaller of the boot and the $1,100,000 gain.
Gain deferred: $800,000.
Basis in the replacement: $700,000, which is its $1,500,000 value less the $800,000 deferred gain.

Example 2: mortgage boot from paying down debt

An owner sells for $2,000,000, with an adjusted basis of $800,000 and a $600,000 mortgage paid off at closing. The intermediary receives $1,400,000. The owner buys a $1,800,000 replacement using all $1,400,000 plus a new $400,000 loan, taking no cash.

Liabilities relieved: $600,000. Liabilities assumed: $400,000.
Boot: $200,000 of net debt relief, even though no cash changed hands.
Gain recognized: $200,000 of the $1,200,000 realized gain; $1,000,000 deferred.

Under the netting rules, the owner could have avoided that boot by borrowing $600,000 on the replacement, or by adding $200,000 of outside cash at the purchase closing. Lender requirements for a larger loan are covered in our guide to apartment building loans.

Example 3: cash out that more debt can’t cure

Same sale as Example 2, but the owner buys a $2,200,000 property with a new $1,000,000 loan, using $1,200,000 of exchange funds, and has the remaining $200,000 released. The owner took on $400,000 more debt than was paid off, but under the regulation, debt assumed does not offset cash received. The $200,000 is boot.

Trading down from the Bay Area

Owners selling a high-value property in Sonoma, Napa, Marin or San Francisco sometimes want a less expensive replacement, a smaller property to manage, or a lower-cost market. Each of those is possible in an exchange, but buying for less than you sold generally means boot unless the difference is made up.

Before you list, compare three paths with your CPA: a full exchange into equal or greater value and debt, a deliberate partial exchange that takes some cash and pays tax on it, and a taxable sale. Some owners split proceeds across more than one replacement to reach full value; our identification rules guide explains how many properties you can name. Others look at a fractional interest such as a Delaware statutory trust to absorb remaining funds; whether one suits you is a question for your adviser.

The deadlines don’t move for a partial exchange. Use our 1031 deadline calculator to count the 45 and 180 days from your sale closing.

California: withholding on boot and later tracking

California’s real estate withholding applies to boot as well. The Franchise Tax Board’s 2026 Form 593 instructions say a deferred exchange is exempt from withholding at the initial transfer. If the seller receives cash or other property exceeding $1,500 from the sale, the qualified intermediary must withhold on it.

Under the instructions, the boot withholding is 3 1/3% of the boot amount, or under the alternative calculation the boot, not to exceed the recognized gain, times the applicable tax rate. If the exchange fails, the intermediary withholds 3 1/3% of the sales price or the alternative amount. Our Form 593 guide explains the forms.

When the replacement property is outside California, the state also tracks the deferred California-source gain through annual Form FTB 3840 filings. As that guide notes, boot received in the original exchange is generally taxable in the exchange year rather than deferred. Our California clawback guide covers the filing.

Depreciation recapture and other details for your CPA

Recognized gain isn’t all taxed the same way. Form 8824 lines 21 and 22 address section 1250 and section 1245 recapture, and the instructions limit those amounts in specific ways. On a rental with years of depreciation, the boot you recognize can include amounts taxed differently from long-term capital gain.

Questions to raise before closing:

Which of my closing costs are exchange expenses that reduce boot?
How much new debt or added cash do I need to avoid mortgage boot?
Is any personal property, such as furnishings or equipment, included in either sale?
What will California withhold, and should I use the alternative calculation?
How does recapture affect the tax on the boot?

Vineyard and ranch exchanges add questions about which assets are real property; see our guide to 1031 exchanges for vineyards and ranch land. For the sale itself, our guide to selling a rental property in California covers preparation, tenants and timing. Diamond may refer you to partners we work with; you’re free to choose any provider.

Questions people ask

What is boot in a 1031 exchange?

Boot is anything you receive in the exchange other than like-kind real property, including cash, other property and net relief from debt. Gain is recognized up to the amount of boot, but never more than your realized gain.

Can I take some cash out of a 1031 exchange?

Yes. The cash is boot and is taxable up to your gain, while the rest of the gain can stay deferred. In California, the intermediary generally must also withhold on boot over $1,500.

What is mortgage boot?

It’s net debt relief: the liabilities paid off or assumed on the property you sell, minus the liabilities you take on and any cash you add on the replacement. If the result is positive, that amount is boot.

Can I avoid mortgage boot by adding my own cash?

Yes. Under Treasury Regulation 1.1031(d)-2, cash you give in the exchange offsets the liabilities you’re relieved of. Taking on new debt also offsets them.

Does taking a bigger loan offset cash I receive?

No. Debt you assume offsets debt relief, but it does not offset cash you receive. Cash out remains boot.

Can I buy a cheaper replacement property in a 1031 exchange?

Yes, but the difference generally becomes boot, either as leftover cash or as net debt relief. To defer all of the gain you generally buy equal or greater value, reinvest all net proceeds and replace the debt.

Is a partial exchange better than selling outright?

It often lowers the tax due now, because only the boot is taxed rather than the whole gain. Whether it fits depends on your goals, recapture and state tax, so model both with your CPA.

This is general information, not tax or legal advice. Boot, recapture and California withholding turn on your exact figures and documents, so work through the numbers with a CPA or tax attorney before you sign the exchange agreement.

Thinking about trading down or taking some cash out of a sale? Our investment property team can help you compare replacement options and timing before you list.

Sources & notes

Last reviewed October 2026 by Matthew Martinez.