Boot is any value received in a 1031 exchange that isn't reinvested in like-kind property — cash received, debt reduction, or trade-down in property value. Boot is taxable immediately at capital gains rates.
To defer ALL tax in a 1031, the replacement property's value and debt must equal or exceed the relinquished property's. Anything short creates boot:
Boot is taxed at ordinary capital gains rates plus depreciation recapture proportion. It's the quiet killer of 1031 exchanges that looked clean on paper.
Common LA 1031 boot scenario: seller does a $6M LA sale into a $4M out-of-state replacement thinking "I got rid of the LA exposure." The $2M trade-down is boot — taxed at approximately 35% combined, so $700K in unexpected tax. Trade equal or up or plan for the boot tax knowingly.
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