In a tax-deferred exchange (also called a 1031 exchange), boot is anything the investor receives that is not “like-kind” real estate. Boot is important because it is the part of the exchange that becomes taxable, even though the rest of the exchange may be tax-deferred.
Basically, boot is the extra value you get that isn’t replaced with similar property. This can be cash taken out of the deal, a reduction in mortgage debt that isn’t offset by new debt, or other non-real-estate property received as part of the exchange. For example, if you sell a property and receive cash back at closing, that cash is boot and is generally taxed. The rule of thumb is: to fully defer taxes in a 1031 exchange, you must reinvest all proceeds into like-kind property of equal or greater value and replace any debt that was paid off.
