--- title: Paying Off a Mortgage When Using a 1031 Exchange description: Replacement property must be of equal or greater value than the relinquished property, but things can get complicated when there's a mortgage involved. image: https://blog.fgg1031.com/hubfs/Mortgage.png --- [info@firstguardiangroup.com](mailto:) [(866)398-1031](tel:(866)398-1031) [![fgg](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2022/fgg.png)](https://brokercheck.finra.org/individual/summary/6470002) [![fgg-871923](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2023/fgg-871923.png)](https://www.bbb.org/us/ca/san-jose/profile/commercial-real-estate/first-guardian-group-1216-887513) [![logo](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/logo.png?width=175&height=56&name=logo.png "logo")](http://fgg1031.com) - [Home](https://fgg1031.com/) - [About Us](https://fgg1031.com/about-us/) - [Current Offerings](https://fgg1031.com/property-listings-directory/) - [Resource Center](https://fgg1031.com/resource-center/) - [Glossary](https://fgg1031.com/glossary/) - [Accommodators](https://fgg1031.com/accommodators/) - [FAQ](https://fgg1031.com/faqs/) - [Tax eBook](https://pages.fgg1031.com/resources/real-estate-tax-deferral-strategies-ebook) - [Real Estate eBook](https://pages.fgg1031.com/real-estate-investing-in-the-new-era2) - [QI eBook](https://pages.fgg1031.com/resources/qualifiedintermediary/ebook) - [Tax Calculator](https://fgg1031.com/tax-calculator/) - [Newsroom](https://fgg1031.com/newsroom/) - [Blog](https://blog.fgg1031.com/blog) - [Events](https://fgg1031.com/events/) - [Contact Us](https://fgg1031.com/contact/) ![search-interface-symbol](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2022/search-interface-symbol.png) ![loader](https://f.hubspotusercontent-eu1.net/hubfs/24949188/Business%20and%20Finance/global/22.gif) ![close](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2022/close.png) From Pages From Blog Pages Load More Load More **Sorry, we couldn't find a match for  "".** Check your spelling or try a related search term. [![Register](https://no-cache.hubspot.com/cta/default/5468919/d02a3ee4-7db2-4d64-b925-a6ebbfe26664.png)](https://cta-redirect.hubspot.com/cta/redirect/5468919/d02a3ee4-7db2-4d64-b925-a6ebbfe26664) ![blog-template-banner](https://blog.fgg1031.com/hs-fs/hubfs/Blog%20Banner/blog-template-banner.png?width=1920&name=blog-template-banner.png "blog-template-banner") # Blog ### Subscribe to Our Blog ### Subscribe to Email Updates ## Featured Post   [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) ## [721 UPREIT Options in DST Programs (Part 3)](https://blog.fgg1031.com/blog/721-upreit-options-in-dst-programs) We have previously written two blog posts on 721 UPREIT options which discuss basic concepts which I encourage readers to review prior to reading this b\[...\] [Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [DST](https://blog.fgg1031.com/blog/topic/dst) [721 Exchange](https://blog.fgg1031.com/blog/topic/721-exchange) [UPREIT](https://blog.fgg1031.com/blog/topic/upreit) [Read More](https://blog.fgg1031.com/blog/721-upreit-options-in-dst-programs) ## Recent Posts [1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [Mortgage](https://blog.fgg1031.com/blog/topic/mortgage) # Paying Off a Mortgage When Using a 1031 Exchange By [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Engaging in a 1031 exchange can allow you to defer capital gains taxes owed on the sale of an investment property. However, to maximize your tax advantages with an exchange, the transaction must meet all IRS rules. Most investors know that the replacement property must be of equal or greater value than the relinquished property, but things can get a bit more complicated when there's a mortgage involved. This post highlights the rules that apply when exchanging property with a mortgage and provides a few examples for clarification. #### **1031 Exchange Replacement Rules** For many investors, the goal of a 1031 exchange is to achieve full deferral of their capital gains taxes. To do this, you must replace 100 percent of both your existing equity *and *your existing debt. For example, if you sell a relinquished property for $500,000 and have a $200,000 mortgage, you must pay at least $500,000 for the[replacement property](https://fgg1031.com/property-listings-directory/)and finance at least $200,000. While this is a straightforward example, it's rare for the numbers to match up so easily in the real world. In many cases, investors contribute additional cash to the transaction, take out a larger mortgage, or engage in a [partial 1031 exchange](https://blog.fgg1031.com/blog/what-is-a-partial-1031-exchange). Here's a closer look at each scenario. ##### **Adding Cash** Using a 1031 exchange to "trade up" to a more valuable property is common. In this case, you may contribute additional cash when you purchase your replacement property. For example, let's assume you currently own a $500,000 property with a $200,000 mortgage, and you plan to replace it with an $800,000 property. In this case, you would have sales proceeds of $300,000 after paying off your $200,000 mortgage. You could combine the $300,000 of sales proceeds with $300,000 of your own funds and a $200,000 mortgage to purchase the new property. Since the replacement property has a higher value than the relinquished property and your debt is the same, this transaction would meet all the requirements of a full 1031 exchange. ##### **Increasing Leverage** Instead of using your cash reserves to purchase a new property, you may choose to increase your leverage by taking out a larger mortgage. Continuing with the example above, you could purchase the $800,000 property by combining your $300,000 in sales proceeds with a new $500,000 mortgage. This would also qualify as a full 1031 exchange since both the value of your replacement property and your new debt would exceed the value of and debt on the relinquished property. ##### **Taxable Boot** It's important to note that a 1031 exchange doesn't have to be an "all-or-nothing" transaction. For example, it is possible to purchase a replacement property with a lower mortgage than you had on the relinquished property or no mortgage at all. However, doing so would create a taxable event. If you sold a property with a $200,000 mortgage and decided only to borrow $150,000 on the new property, you would essentially have taken receipt of $50,000 in [taxable boot](https://blog.fgg1031.com/blog/avoiding-boot-in-a-1031-exchange). #### **The Bottom Line** If the property you are relinquishing has a mortgage, you will have to pay it off when you sell. However, to receive the full tax deferral of a 1031 exchange, you'll need to take out a new mortgage of equal or greater value when purchasing your replacement property. Properly executing a 1031 exchange can be challenging, particularly when debt is involved. Therefore, before getting started, it's advisable to consult with a tax, legal, or exchange professional to ensure you don't inadvertently make a costly mistake. For more information, please contact us at [info@FGG1031.com](mailto:info@FGG1031.com) or at 408 392-8822.   [![](https://no-cache.hubspot.com/cta/default/5468919/interactive-183026367788.png)](https://blog.fgg1031.com/hs/cta/wi/redirect?encryptedPayload=AVxigLLko3lTtKSNd5mqkl8gbYam4n09UrYsom7g4zI0mC5V2jU%2B2GKIBf%2FKTseJbDOdaWnkGxxQ8i0LG1DgoxP2qGFB%2BODRR6hVm7zLsqkgT50LT9tt%2BSmn4%2BoC7nK%2FcOggSpE22WCwtRfHBw65UGOoOydhmDemM6WtuES8ad8p9uc9clA7fWMvHLbYFFL0Ab3FRqE4V5vH4MrpdMT2C7uf4ZI9UoR3Ln5IseNdggRn4Gna&webInteractiveContentId=183026367788&portalId=5468919) --- ##### **Help Save 1031 Exchanges** Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking [HERE](https://p2a.co/XLBiUYT)[**.**](https://p2a.co/XLBiUYT) --- ### [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Paul M. Getty is one of the most experienced 1031 exchange specialists in the United States, with a career in real estate that spans over 35 years and more than $5 billion in commercial transactions across every major asset class. His work covers single-family rentals, apartments, retail, office, multifamily, and student and senior housing, giving him a practical understanding of how different property types perform across market cycles and how investors can move between them using tax-deferred exchange strategies. As President and CEO of FGG1031 | First Guardian Group, Paul advises investors through the full 1031 exchange process, from identifying qualifying replacement properties to structuring acquisitions through Delaware Statutory Trusts (DSTs) and wholly owned real estate. His guidance covers both the compliance requirements of a valid exchange and the investment decisions that determine long-term portfolio outcomes – a combination that is difficult to find in a single advisor. Paul holds a California and Texas real estate broker license and carries Series 22, 62, 63, and 82 securities licenses as a registered representative with Emerson Equity LLC, member FINRA /SIPC. He has represented buyers and sellers across complex commercial transactions, sourced and structured debt and equity, and worked alongside nationally recognized firms including Marcus Millichap, CBRE, JP Morgan, and Morgan Stanley. Before founding FGG1031, he co-founded Venture Navigation, a boutique investment banking firm whose M&A and IPO activity generated over $700 million in investor returns. Paul holds an MBA in Finance from the University of Michigan and a bachelor’s degree in chemistry from Wayne State University. He has also completed coursework in artificial intelligence at Stanford University. He is the author of four books on real estate investing and tax deferral strategy, including Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST) and Real Estate Investing in the New Era, both available on Amazon. A frequent speaker on 1031 exchanges, DST investing, and real estate tax strategy, Paul Getty is a recognized voice for investors and advisors seeking guidance on capital preservation through tax-deferred real estate investment. ## Your Comments : This is a search field with an auto-suggest feature attached. - There are no suggestions because the search field is empty. - Latest Posts - Popular Posts [Partial 1031 Exchange: How It Works, What Gets Taxed, and When It May Make Sense](https://blog.fgg1031.com/blog/partial-1031-exchange-how-it-works) [ 1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [721 UPREIT Options in DST Programs (Part 3)](https://blog.fgg1031.com/blog/721-upreit-options-in-dst-programs) [ Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ 721 Exchange](https://blog.fgg1031.com/blog/topic/721-exchange) [ UPREIT](https://blog.fgg1031.com/blog/topic/upreit) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) [Can a 9% Taxable Return Beat a 4.5% Tax Advantaged DST?](https://blog.fgg1031.com/blog/can-a-9-taxable-return-beat-a-4.5-tax-advantaged-dst) [ Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) ### Categories - [1031 Exchange (143)](https://blog.fgg1031.com/blog/tag/1031-exchange) - [DST (59)](https://blog.fgg1031.com/blog/tag/dst) - [Real Estate Investors (43)](https://blog.fgg1031.com/blog/tag/real-estate-investors) - [Blog (41)](https://blog.fgg1031.com/blog/tag/blog) - [New featured (36)](https://blog.fgg1031.com/blog/tag/new-featured) - [Taxes (18)](https://blog.fgg1031.com/blog/tag/taxes) - [Estate Planning (10)](https://blog.fgg1031.com/blog/tag/estate-planning) - [Investor (8)](https://blog.fgg1031.com/blog/tag/investor) - [REIT (7)](https://blog.fgg1031.com/blog/tag/reit) - [Capital Gains (6)](https://blog.fgg1031.com/blog/tag/capital-gains) - [Qualified Intermediary (6)](https://blog.fgg1031.com/blog/tag/qualified-intermediary) - [721 Exchange (4)](https://blog.fgg1031.com/blog/tag/721-exchange) - [Featured (4)](https://blog.fgg1031.com/blog/tag/featured) - [Opportunity Zones (4)](https://blog.fgg1031.com/blog/tag/opportunity-zones) - [1031 Exchange Funds (3)](https://blog.fgg1031.com/blog/tag/1031-exchange-funds) - [Inflation (3)](https://blog.fgg1031.com/blog/tag/inflation) - [Retirement Planning (3)](https://blog.fgg1031.com/blog/tag/retirement-planning) - [Reverse 1031 Exchange (3)](https://blog.fgg1031.com/blog/tag/reverse-1031-exchange) - [TIC (3)](https://blog.fgg1031.com/blog/tag/tic) - [Apartment Market (2)](https://blog.fgg1031.com/blog/tag/apartment-market) - [Boot (2)](https://blog.fgg1031.com/blog/tag/boot) - [CA Landlords (2)](https://blog.fgg1031.com/blog/tag/ca-landlords) - [Covid-19 (2)](https://blog.fgg1031.com/blog/tag/covid-19) - [Depreciation (2)](https://blog.fgg1031.com/blog/tag/depreciation) - [Depreciation Recapture (2)](https://blog.fgg1031.com/blog/tag/depreciation-recapture) - [IRS (2)](https://blog.fgg1031.com/blog/tag/irs) - [NNN (2)](https://blog.fgg1031.com/blog/tag/nnn) - [UPREIT (2)](https://blog.fgg1031.com/blog/tag/upreit) - [1033 Exchange (1)](https://blog.fgg1031.com/blog/tag/1033-exchange) - [1099A (1)](https://blog.fgg1031.com/blog/tag/1099a) - [AB1771 (1)](https://blog.fgg1031.com/blog/tag/ab1771) - [CPA (1)](https://blog.fgg1031.com/blog/tag/cpa) - [Cost Segregation (1)](https://blog.fgg1031.com/blog/tag/cost-segregation) - [Mortgage (1)](https://blog.fgg1031.com/blog/tag/mortgage) - [PPM (1)](https://blog.fgg1031.com/blog/tag/ppm) - [Rent Relief (1)](https://blog.fgg1031.com/blog/tag/rent-relief) - [Retail (1)](https://blog.fgg1031.com/blog/tag/retail) - [The Tax Cuts and Jobs Act (1)](https://blog.fgg1031.com/blog/tag/the-tax-cuts-and-jobs-act) see all ### Read more of what you like. ## [Partial 1031 Exchange: How It Works, What Gets Taxed, and When It May Make Sense](https://blog.fgg1031.com/blog/partial-1031-exchange-how-it-works) ## [Understanding Loan-to-Value (LTV) in DST 1031 Exchanges](https://blog.fgg1031.com/blog/understanding-loan-to-value) ## [How 1031 Exchange Proceeds and QI-Held Funds Are Taxed](https://blog.fgg1031.com/blog/how-1031-exchange-proceeds-and-qi-held-funds-are-taxed) [![FGG_Footer_White](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/FGG_Footer_White.png?width=300&height=95&name=FGG_Footer_White.png "FGG_Footer_White")](http://fgg1031.com) 97 East Brokaw Road, Suite 350, San Jose, CA 95112 [(866) 398 1031](tel:(866)%20398%201031) [info@firstguardiangroup.com](mailto:info@firstguardiangroup.com) ## Recent Blogs - [Investing in Senior Housing October 20, 2022](https://blog.fgg1031.com/blog/investing-in-senior-housing) - [A Closer Look at the 7 Deadly Sins October 20, 2022](https://blog.fgg1031.com/blog/a-closer-look-at-the-seven-deadly-sins) - [What is a Springing LLC? October 20, 2022](https://blog.fgg1031.com/blog/what-is-a-springing-llc) ## Useful Links - Home - About Us - Blogs - Testimonials from Past Customers - Resource Center - Current Offerings Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum. This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal. Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits. IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. Securities offered through registered representatives of [LightPath Capital, Inc.](http://www.lightpathcapital.com/) Member [FINRA](http://www.finra.org/) / [SIPC](https://www.sipc.org/). FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities. Copyright 2022, All Rights Reserved, FGG1031 [![FGG_Footer_White](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/FGG_Footer_White.png?width=300&height=95&name=FGG_Footer_White.png "FGG_Footer_White")](http://fgg1031.com) 97 East Brokaw Road, Suite 350, San Jose, CA 95112 [(866) 398 1031](tel:(866)%20398%201031) [info@firstguardiangroup.com](mailto:) [![Bitmap](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2023/Bitmap.png)](https://brokercheck.finra.org/individual/summary/6470002) ## Recent Blogs - [Understanding the Difference Between Inheritance and Estate Tax August 3, 2023](https://blog.fgg1031.com/blog/understanding-the-difference-between-inheritance-and-estate-tax) - [Public or Private Real Estate? Your Investment Portfolio May Need Both July 27, 2023](https://blog.fgg1031.com/blog/public-or-private-real-estate-your-investment-portfolio-may-need-both) - [How to Use 1031 Exchange Funds to Improve Your Replacement Property July 20, 2023](https://blog.fgg1031.com/blog/how-to-use-1031-exchange-finds-to-improve-your-replacement-property) ## Useful Links - [Home](http://fgg1031.com/) - [About Us](https://fgg1031.com/about-us/) - [Blogs](https://blog.fgg1031.com/blog) - Testimonials from Past Customers - [Resource Center](https://fgg1031.com/resource-center/) - [Current Offerings](https://fgg1031.com/property-listings-directory/) FGG1031 | First Guardian Group and Emerson Equity LLC do not provide legal or tax advice. Securities offered through [Emerson Equity LLC](http://www.emersonequity.com/) Member [FINRA/SIPC](http://finra.org/) and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure: - There is no guarantee that any strategy will be successful or achieve investment objectives; - Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments; - Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities; - Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments; - Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; - Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward looking statements are never an assurance of future results. Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read and understand all of the risks associated with buying private placement securities. Investments are not guaranteed or [FDIC](http://fdic.org/) insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur. **Risk Disclosure:** Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by FGG1031 | First Guardian Group, Emerson Equity LLC, or any affiliate, or partner thereof. FGG1031 | First Guardian Group does not warrant the accuracy or completeness of the information contained herein. Copyright 2026, All Rights Reserved, FGG1031