Boot Confusion: When Debt in 1031 Exchanges Becomes a Hidden Tax Trap

 A 1031 Exchange California can be a great way to defer taxes when selling an investment property. You swap one property for another of equal or greater value. On paper, it sounds simple. In reality, debt rules can create a hidden tax problem. That problem is called “boot.”

What is Boot?

Boot is anything you receive in a 1031 exchange that is not like-kind property. Many thinks of boot as cash, but debt relief can also count. If you owe less on your new property than you did on your old one, the IRS may treat that difference as taxable.

How Debt Creates Boot

Imagine you sell a rental for $500,000 with a $200,000 mortgage. You buy a new property for the same price but only take on a $150,000 mortgage. That $50,000 difference can be seen as boot. Even if you do not receive that money in cash, it might still create a taxable event.

Why This Catches People Off Guard

You might focus only on matching property values, thinking you are safe. But the IRS looks at both property and debt. Reducing debt without replacing it with additional equity might trigger taxes. This is why planning matters before you close.

Avoiding the Debt Boot Trap

Here are a few steps you can consider:

Match or exceed your old loan – Keep the same or higher debt amount on your replacement property.

Add cash if needed – If you cannot get a larger loan, you can add your own funds to cover the difference.

Work with a qualified intermediary – They can help ensure your transaction meets IRS requirements.

Plan early – Debt decisions should be part of your 1031 strategy from the start. 

Indirect Help is Closer Than You Think

We made it easy for you to search right into our informative site. Choose which loan type you are desiring, and learn how we make it a simple process for you. When you know your financing options, you can better avoid costly surprises in your 1031 Exchange California.

The Bottom Line

Debt in a 1031 Exchange California is not just about borrowing power. It is also about tax consequences. Even if your property values match perfectly, a lower debt amount can create boot. Understanding this before you make a move can save you from unexpected tax bills.

Always review your financing and replacement property details early in the process. That way, you keep your exchange within the rules and avoid turning a smart tax move into an expensive mistake.

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