Cash Boot

Boot is shorthand for the "other property or money" that section 1031(b) taxes.

The Code never uses the word boot. Section 1031(b) says that when an exchange would qualify except that you also receive "other property or money," gain is recognized "in an amount not in excess of the sum of such money and the fair market value of such other property." Section 1031(c) adds that no loss is recognized on such an exchange.

Cash boot covers more than a check at closing. Proceeds the intermediary releases to you and non-like-kind property such as furniture both count, and Publication 544 notes that prorated property taxes and rents, security deposits and repairs on a closing statement are not exchange expenses, so they do not reduce it. See security deposits and rent prorations.

Timing matters. In Reg. section 1.1031(k)-1(j)(3), Example 2, the taxpayer received $10,000 when the relinquished property closed and paid $10,000 back toward the replacement; the $10,000 received was still boot. Example 4 adds that a mere right to demand $30,000 in cash is constructive receipt of $30,000.

In a hypothetical exchange, cash boot is taxed even though the rest of the trade qualifies.

Hypothetically, you exchange a property worth $1,000,000 with an adjusted basis of $400,000 and no debt, and you receive a $900,000 replacement plus $100,000 in cash. Your realized gain is $600,000. Under section 1031(b), $100,000 of it is recognized, and the other $500,000 is deferred.

Under section 1031(d), the replacement's basis is $400,000: the old basis, less the $100,000 received, plus the $100,000 of gain recognized. That is the replacement's $900,000 value minus the $500,000 still deferred.

On Form 8824, the $100,000 goes on line 15, the $900,000 value on line 16, and line 20 takes the smaller of line 15 or the realized gain on line 19. If you had also paid exchange expenses, line 15 would be reduced by them. Costs and taxes are ignored here for simplicity; run your own numbers with your CPA.

It bites in deferred exchanges, where cash reaches you before or after the replacement closes.

Money left with the intermediary after your last replacement closes comes back as cash boot; see leftover cash after a 1031 exchange. Using proceeds to clear a credit line at closing works the same way, which paying off a HELOC with exchange funds covers.

When boot arrives in the year after the sale, Reg. section 1.1031(k)-1(j)(2) can let the installment rules treat it as received when paid, provided you had a bona fide intent to complete an exchange at the start. Taking a smaller loan on the replacement is a different problem, covered under mortgage boot.