Is a cash out DST just taking boot?

Boot is defined by the exchange; refinance cash is not part of it

Section 1031(b) recognizes gain where the property received 'consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money.' Money at the closing table, money left with the intermediary, and debt relief you do not replace are all inside that definition, as what is boot explains.

Cash from a later loan secured by the property you received is outside it. Commissioner v. Tufts says loan proceeds 'do not qualify as income to the taxpayer' because of the obligation to repay. That is the distinction our cash out DST page relies on when it describes cash after the trust's refinance.

The difference holds only if the refinance really is separate

The exchange funds are locked. Reg. Section 1.1031(k)-1(g)(6) requires the agreement to deny you any right to 'receive, pledge, borrow, or otherwise obtain the benefits' of them during the exchange period, so cash cannot be drawn against the exchange itself.

Our pages place the refinance after a defined period, as a step of the investment. We found no IRS ruling or court decision addressing these structures specifically, so the protection is the structure and its documentation: ask for the offering's tax opinion, and for how the refinance squares with Rev. Rul. 2004-86, which bars the trustee from refinancing the acquisition loan. General timing principles for refinances near an exchange are in refinancing before or after a 1031.

Worked example: $400,000 of cash two ways

Hypothetical, round figures. You sell a rental for $2,000,000 with no mortgage, an adjusted basis of $600,000 and $500,000 of past depreciation, so the realized gain is $1,400,000. You want $400,000 of cash.

Taking boot: you reinvest $1,600,000 and keep $400,000. All $400,000 falls in the depreciation layer, taxed at up to 25% plus 3.8% net investment income tax under Topic 409 and the NIIT rules, about $115,200 federal. You net about $284,800 and owe nothing on it later.

Cash out DST: you exchange all $2,000,000, placing $500,000 in a cash out DST. On the 80% end of the range our page describes, the refinance returns about $400,000 after a defined period, untaxed when received. You carry your share of a larger non-recourse loan, receive no distributions from that trust, and the deferred gain is still due at a taxable exit. Run your own numbers with your CPA.

When paying the tax on boot is the better trade

Boot wins on simplicity and certainty. The cash is available at the sale or day 180, the tax is known, and the rest of the exchange can go into income-paying property without added leverage. Small cash needs rarely justify a complex structure; intentional boot works through when to plan for it.

It can also be cheap. Boot taxed in a low-income year may fall partly in the 0% capital gain band, which for 2026 ends at $98,900 joint and $49,450 single under Rev. Proc. 2025-32; see the zero percent capital gains rate.

The cash out route fits the owner who needs a large amount, plans to hold until death or exchange again, and accepts no current income from that slice. The limits on how much it returns are in how much cash a zero cash flow DST returns.

The risks you take on in exchange for keeping the deferral

A highly leveraged single-tenant property can lose its tenant or its value, and the lender is paid first. If the property is foreclosed, Reg. Section 1.1001-2 treats the full nonrecourse balance as money received, which can create a gain with no cash to pay the tax.

Interests are illiquid until the property sells, and the cash depends on the refinance happening on the terms the documents describe. Our cash out DSTs and liquidity article covers the exit side.