Updated August 16, 2026
Boot is anything you receive in an exchange that is not like-kind property, and it is taxable up to the amount of your realized gain. It arrives in two common forms: cash boot, where you do not reinvest all the net proceeds, and mortgage boot, where the debt on your replacement property is less than the debt you paid off on the property you sold. Boot does not disqualify the exchange — the rest of the transaction still defers. It simply means part of the gain becomes taxable in the year of sale. Most boot is unintentional, and most of it is avoidable with arithmetic done before the replacement property is chosen rather than after.
Cash boot. You sell for $6,000,000 and buy a replacement for $5,600,000. The $400,000 you did not reinvest is boot, and it is taxable to the extent of your gain.
Mortgage boot. You sell a building with a $3,000,000 loan that gets paid off, and buy a replacement with a $2,400,000 loan. The $600,000 reduction in debt is treated as boot even though you never touched any cash. This is the one that catches sellers, because nothing about it feels like receiving money.
The two can offset in one direction: adding cash to the replacement purchase can cover a debt shortfall. The reverse does not work — new debt does not offset cash you took out.
To fully defer, the replacement property generally must be equal or greater in both value and debt, and all net proceeds must be reinvested. Practically:
Buy up in price. Replacement value at least equal to the relinquished property's sale price.
Replace the debt, or add cash instead. Either take on at least as much debt, or contribute additional cash to make up the difference.
Reinvest everything. All net proceeds go through the qualified intermediary into the replacement purchase.
Falling short in any of those creates boot in the amount of the shortfall.
Paying closing costs out of exchange funds. Some transaction costs can properly be paid from proceeds; others are treated as boot received. Ask the intermediary and the CPA which is which before closing, not after.
Taking cash to cover the tax. Sellers sometimes hold back proceeds to pay the anticipated tax bill — which itself creates the taxable event.
Paying off personal debt at closing. Anything not related to the property can convert proceeds into boot.
Buying a smaller replacement with less leverage. The most common cause. A seller trading a leveraged LA building for a smaller all-cash property creates mortgage boot even though they reinvested every dollar of equity.
Seller financing on the sale. A carryback note is generally not like-kind property, and it complicates the exchange considerably.
Prorations and deposits. Security deposit transfers and rent prorations have specific treatment that should be reviewed with the intermediary.
Partial deferral is a legitimate outcome. A seller who wants some liquidity may deliberately accept boot on a portion and defer the rest. That is a decision, and it is a perfectly reasonable one.
What is not reasonable is discovering boot after closing. The tax on unintended boot is real, and it arrives in a year when the seller has already committed the money. The failure mode is almost always the same: nobody ran the value-and-debt arithmetic before the replacement property was identified.
Two features of this market make mortgage boot more likely than average. First, many LA sellers are trading out of highly leveraged buildings held for decades. Second, sellers frequently exchange into lower-leverage or all-cash replacement properties precisely because they want less debt and less management in the next phase — which is exactly the move that generates mortgage boot. The intention is sensible; the tax consequence is simply not anticipated.
The other pressure is the 45-day identification deadline. Sellers who have not lined up replacement candidates before closing end up choosing under time pressure, and time pressure produces both bad purchases and unintended boot.
Run the numbers before you identify: replacement value at least equal to your sale price, replacement debt at least equal to what you are paying off or the difference covered with cash, and every dollar of proceeds reinvested through the intermediary. Ask your CPA and your qualified intermediary specifically which closing costs can be paid from exchange funds. And if you intend to take some cash out, decide that deliberately and know what it costs — partial deferral by choice is fine, partial deferral by accident is not.
Can I offset mortgage boot by adding cash?
Yes. Contributing additional cash to the replacement purchase can make up for taking on less debt. The reverse does not work — taking on more debt does not offset cash you pulled out of the exchange.
Is boot taxed as capital gain?
Boot is taxable up to the amount of your realized gain, and the character depends on the composition of that gain. Where depreciation recapture is present it is generally recognized first, which on a long-held LA building means boot is often taxed at the less favorable recapture rate rather than the capital gain rate.
Does paying my broker's commission from proceeds create boot?
Ordinary and customary transaction costs of the sale are generally payable from exchange proceeds without creating boot. Other costs are treated differently. Confirm the specific list with your intermediary and CPA before closing rather than assuming.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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