In the context of a 1031 exchange, 'boot' refers to any property or cash received that is not 'like-kind' to the property being sold. Because the primary benefit of a 1031 exchange is tax deferral, any portion of the proceeds not reinvested in the new property is considered boot and becomes taxable in the year of the exchange.
How It Applies to Florida Landlords
Florida landlords performing a 1031 exchange to upgrade their portfolios must be careful not to trigger boot. If you sell a rental house in Orlando and receive cash back from the transaction, that cash is taxable boot. To achieve full tax deferral, the replacement property must have a value and debt load equal to or greater than the relinquished property. Even a small cash withdrawal during the closing process can create a taxable event.
Key Takeaways
- Boot is taxable as capital gain.
- It includes cash, debt relief, or non-real estate assets received.
- It occurs when the replacement property is cheaper or has less debt than the sold property.
- Always consult a qualified intermediary to avoid inadvertent boot.