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

Why It’s Important to Avoid Boot in a 1031 Exchange

In a 1031 exchange, you want to do your best to avoid receiving any boot so your exchange is completely tax-deferred. But many people aren’t sure what exactly “boot” is. In this article, we are going to talk about boot in a 1031 exchange – what it is and how to avoid it.

What Exactly is Boot?

In a 1031 exchange of real estate, “boot” means any non like-kind property that the taxpayer receives during the course of the exchange. Ideally, you want to avoid receiving any boot in your exchange. The goal with a like-kind exchange is to defer 100% of your capital gains. If you receive boot, you will recognize at least a partial amount of that gain and the exchange will not be completely tax deferred.

Tips for Avoiding Boot

Because boot can trigger taxable gain, it’s important to do everything you can to avoid receiving it during your exchange.

You want to pay special attention to any taxes, rent prorations, and security deposits during closing. The best course of action is to keep these off the closing statement and pay for them with cash out of pocket to avoid boot. Certain closing costs can also potentially trigger boot. It’s important to consult with a qualified intermediary about these items before your closing.

1031 Exchange Companies in Minnesota

At CPEC1031, LLC, our qualified intermediaries have been working with clients in Minnesota and across the country for the past three decades. Our team can advise you on the details of your exchange, prepare your 1031 documents, and answer any of your questions throughout the process. If you want to learn more about the tax-saving benefits of the 1031 exchange, don’t hesitate to reach out to us today and set up an appointment via phone or at our office in downtown Minneapolis.

• 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

How to Effectively Deal with Taxable Boot in a Like-Kind Exchange

Boot is a big deal in the realm of 1031 exchanges, but many taxpayers don’t pay enough attention to it, and end up paying the price (literally). In this article, we are going to talk about how to deal with taxable boot in a 1031 exchange.

A Brief Refresher on Boot

First, let’s make sure we’re all on the same page when we use the word “boot.” In a 1031 exchange, boot refers to any non like-kind property received during the course of a 1031 exchange. Typically, boot comes in the form of cash. When a taxpayer receives any cash proceeds during their 1031 exchange, they are deemed to have received boot and will be taxed accordingly. In general, you want to avoid boot at all costs in a 1031 exchange.

Dealing with Boot

Boot is a complex topic but the most important thing to remember is you do NOT want to receive any boot at any point during the 1031 exchange process. So how do you avoid boot? By following the strict regulations of section 1031 of the Internal Revenue Code. This is where a qualified intermediary can be invaluable in helping you through your exchange.

Defer Your Capital Gains Taxes

In a 1031 exchange, you can defer your capital gains taxes when selling a piece of investment real estate. But it’s not quite as easy as it sounds. You need to satisfy a number of requirements in order to have a successful 1031 exchange. This can all get a bit complicated, but with the help of a qualified intermediary, your exchange can go off without a hitch! Contact our intermediaries today to learn more about our services and to set up a time to chat about your exchange. You can find us at our primary office in downtown Minneapolis.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved