A 1031 exchange can defer taxes on the sale of investment properties when the assets are reinvested in another investment property. If the replacement property has a smaller mortgage than the property that was sold, the IRS will likely conclude that some of the value of the property sold was used to pay down debt rather than invest in property. The reduction in debt is referred to as mortgage boot. It is considered to be the result of money that was not reinvested in property and will be taxed. Learn more about the rules of 1031 exchanges.