Ensuring that the replacement property value is equal to or greater than the value of your exchange funds will help you prevent incurring a capital gains tax liability when you complete your exchange. The value difference between a relinquished property and the replacement property is referred to as a boot. A tax liability may be created if:
Your replacement property is of lesser value than your exchange funds.
The investor’s 1031 debt replacement on the replacement property does not match that on the relinquished property.
The exchange is completed using a non-like-kind or personal property.