Replacing VALUE of Debt to Fully Defer Taxes

Many taxpayers (and tax advisors) are under the misconception that the IRS mandates that they must have equal or greater debt on their 1031 Exchange Replacement Property (property taxpayer is purchasing). This is not the case. The taxpayer does need to replace the VALUE of the debt they had on the Relinquished Property (property taxpayer is selling). However, the debt does not have to be replaced with debt. Let’s look at an example:


Let’s assume that the taxpayer sells investment real estate for $1,000,000. That property is comprised of both equity and debt. In this example, the taxpayer has $600,000 of equity and a $400,000 loan.

If the taxpayer sells her property, in order to get full tax deferral utilizing a 1031 Exchange, she will have to roll all of her net equity (a little less than $600,000 after closing costs, etc.) into the Replacement Property AND she will need to replace the VALUE of her debt – the $400,000 loan.

In replacing the VALUE of the debt, the IRS is not concerned how the taxpayer replaces that $400,000 loan. In fact, the taxpayer has a number of options, including:

  • Traditional Financing (another loan from a lender)
  • Cash (other cash that the taxpayer has available)
  • Seller-Financing (the seller of the Replacement Property finances the purchase using a Carryback Note)
  • Private Money

And any combination of the above-mentioned options would be suitable. For example, the taxpayer could go back her bank and obtain a $100,000 loan, bring in $100,000 of fresh cash, have a Carryback Note between her and the Seller of the Replacement Property for $100,000, and obtain a Private Money loan in the amount of $100,000.

When all of those are added together, the taxpayer has successfully replaced the VALUE of the $400,000 debt that she had on the Relinquished Property, and when completing her 1031 Exchange will have fully deferred her taxes.


About IPX1031

At IPX1031, we pride ourselves on being the industry leader in 1031 expertise, service and security. We aim to be your complete information resource and look forward to helping you and/or your clients maximize qualifying investments through a 1031 Exchange strategy. For more information about debt replacement, our company, our complimentary 1031 Exchange webinars, or to initiate an exchange, visit our website at www.ipx1031.com or email or call today.


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