A Few Tips for Avoiding Taxable Boot in a Like-Kind Exchange

“Boot” is any cash or non-like-kind property you receive in a 1031 exchange. It’s important to remember that boot is taxable. If you do not reinvest in like-kind property, any proceeds you receive is taxable boot!

2 Ways to Receive Boot

There are two common ways in which investors receive boot during a 1031 exchange:

1. Cash Boot: You receive cash or other property from the 1031 exchange.

2. Mortgage (Debt Relief) Boot: You owe less debt on your new 1031 replacement property than you paid off on the old relinquished property. For example, if you sell a property with a $500k mortgage and replace it with a property that has a $400k mortgage, you have $100k in debt relief. This $100k would be taxable boot.

How to Avoid Boot

Here are some tried and true methods for avoiding boot in your 1031 exchange:

• Make sure you reinvest all of your proceeds into your replacement property.

• Acquire property of equal or greater value.

• Replace or offset debt relief.

• Do not take any cash at closing.

If you want to take some cash at closing, you have the option to do so, but keep in mind that any cash you take is taxable. For example, if you sell a property for $1 million and purchase a replacement property for $950k, and pocket $50k in cash, that $50k is taxable boot.

Find a 1031 Exchange Intermediary

If you are embarking on a 1031 exchange, it’s a best practice to work with a qualified intermediary who has experience in the 1031 exchange industry. At CPEC1031, LLC our intermediaries have facilitated countless like-kind exchange transactions of all types (forward, reverse, construction, and more!) We can guide you through the like-kind exchange process and make sure you have a comprehensive understanding of the ins and outs of the 1031 exchange process so you are ready when it comes time to close on your property. Contact our team of 1031 exchange professionals today to set up a time to chat.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

3 Pro Tips For Dealing with Boot in a 1031 Exchange

Receiving any taxable boot during the 1031 exchange process can completely derail your like-kind exchange. In this article, we are going to walk through three pro tips for dealing with boot in a 1031 exchange of real estate.

Watch for Prorated Taxes, Rents & Security Deposits

Keep an eye out for prorated taxes, rents, or security deposits charged back at closing. These can created unintended boot. Have your tax advisor review your settlement statement before you close on your property.

Do The “Boot Test”

Use the “Boot Test” – if your replacement property value and debt assumed is greater than or equal to your relinquished property value and debt paid off, then you are probably safe.

Keep Your Hands Off the Proceeds

Never touch the proceeds yourself. The moment you (or your agent) have access to the funds, it is considered constructive receipt and your 1031 exchange will fail.

Like-Kind Exchange Company in Minnesota

Don’t let boot catch you off guard in a 1031 exchange. Even small details can turn your tax-deferred exchange into a taxable event. Partner with a qualified intermediary who keeps every dollar segregated and compliant.

If you’ve been searching for a like-kind exchange company in Minnesota, you’re in the right place! CPEC1031, LLC is a Minneapolis-based like-kind exchange company with more than two decades of experience in the 1031 exchange industry. We have a skilled team of qualified intermediaries standing by to walk you through the specifics of your next 1031 exchange. Whether you’re doing a forward exchange, reverse exchange, construction exchange, or something more complex – we’ve got the knowledge and expertise to make sure you are able to defer 100% of your capital gains taxes.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange 101: What is Boot?

There are many terms of art in the 1031 exchange world, and one of the most often used words is boot. If you sell an apartment building and you receive cash, that would be considered boot or non like-kind property that you receive during the exchange. If you want to defer every cent of tax, you want to avoid receiving boot and only receive like-kind replacement property.

What are Some Common Ways that People Receive Boot?

When you sell the relinquished property if the buyer says “hey I don't have enough money to pay for this thing, can I give you an IOU or a promissory note for a portion of the purchase price?” If the taxpayer selling the property takes that IOU or note guess what they’ve just received? Boot. If you want to have a simple 1031 exchange, avoid seller-backed financing.

Another way that you can receive boot is on the purchase of the replacement property.  You need to make sure that all of your equity, all of your net proceeds gets applied for the purchase of your like kind real estate.

On the Replacement Property Side…

There's a couple different ways that you can walk off the dock on the replacement side. One way is to have too large of a mortgage or deed of trust on your replacement property such that you don't end up applying all of your exchange funds for the purchase and you end up getting back surplus or unused exchange funds at the bottom of the settlement statement.

You want zero cash due to the buyer. You want all of your funds to be applied towards the purchase price which might mean that you have to ratchet back your lender and make sure they only loan you the amount you need to make up the purchase price.

Another way that you could end up inadvertently receiving boot on the replacement property is if you receive non like kind property as part of the purchase of the replacement property.  For example, if you buy a fully furnished condominium with a brand-new granite table and that table is a movable item of personal property or chattel you want to make sure that you pay for the furnishings with non 1031 funds not the use of your exchange for me because that money that you applied towards the purchase of the furniture could result in you end up receiving boot with your exchange funds not like-kind real estate.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

The Many Forms of Boot in a 1031 Exchange

As we’ve discussed before, you want to avoid receiving boot at all costs in your 1031 exchange. But many people don’t realize that boot can come in several different forms. In this article, we are going to explain the many forms that boot can take in a 1031 exchange and how to avoid each one.

Cash Boot

Cash is the most common type of boot. Essentially, any cash that you receive during the 1031 exchange process is considered boot. You then need to pay capital gains taxes on that cash boot, which is exactly what you want to avoid in a 1031 exchange of real estate. Your exchange won’t necessarily fail if you receive cash boot, it just won’t be a completely tax-deferred exchange.

Debt Liability

Cash is not the only form of boot you can potentially receive in a 1031 exchange. If your debt goes down when you exchange into your replacement property, that can also be considered taxable boot. That’s why it’s important to make sure your replacement property is equal to or greater than your relinquished property when it comes to debt.

Non-Transactional Costs

Rent prorations, tax prorations, and any other charges to the borrower that are unrelated to the closing of the replacement property can also be considered boot. Bring cash to the closing table and use it to pay these costs so you don’t recognize any gain on them.

Minnesota Qualified Intermediary Professionals

For 20 years, CPEC1031 has been helping people with their 1031 exchanges from start to finish. Our qualified intermediaries are proficient in facilitating 1031 exchanges of real estate. Whether you’re interested in a forward exchange, a reverse exchange, or a build-to-suit exchange – we can help. Contact us today at our Minneapolis office to get your 1031 exchange up and running. We work with clients in Minnesota and across the country.

• Start Your 1031 Exchange: If you have questions about 1031 Exchanges and boot, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

3 Workarounds to Avoid Boot When Financing a 1031 Exchange with a Note

Can you do a 1031 exchange and take back a note to finance the buyer’s purchase? That’s our topic for today’s article.

Workarounds

Receiving a note or contract for deed may trigger boot. Here are a few potential workarounds:

• You can use a note and have the seller bring the loan money to the closing so the loan is not funded with the net proceeds from the sale. This way all of the funds can go directly into the 1031 exchange account.

• You can run the note of contract for deed in favor of the qualified intermediary. This insulates the person doing the exchange from receiving any boot. Then, prior to closing on the replacement property, you can buy the note from the intermediary so there is cash in the 1031 exchange account.

• If the replacement property seller is willing to accept the note as partial payment, it might be possible to allonge the note together with additional cash consideration.

1031 Real Estate Exchanges in Minnesota

CPEC1031 is one of the most experienced 1031 exchange companies in Minnesota – having just celebrated twenty years in business. Our team of qualified intermediaries helps clients across the country with their 1031 exchanges of real property. A 1031 exchange can save you a lot of money in capital gains taxes, and a qualified intermediary can make sure that you have all of your bases covered during your exchange. Contact us today at our downtown Minneapolis office and learn more about the tax-saving benefits of the 1031 exchange!

• Start Your Exchange: If you have questions about boot in 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved