A common misconception exchangers have is the reference to replacing their debt on the sale property within an exchange. If you are selling an investment that has a mortgage (debt) then you must replace the value of that debt along with the additional fair market value of the property you are selling. Mortgage Boot occurs when an exchanger does not acquire equal or greater debt in the Replacement Property. Keep in mind, debt can only be offset by cash, cash cannot be offset by debt.
Example of an exchanger offsetting debt with personal cash to achieve a fully tax deferred exchange:
Linda sells her rental property for $700,000 which includes a mortgage payoff of $300,000. Because she does not want to pay the capital gains tax, she will need to replace the value (including the debt) of her relinquished property by purchasing property that is equal or greater in value and acquiring a new loan for at least $300,000. Linda has saved a substantial amount of inheritance money. She decides to purchase a property worth $800,000 by rolling over all her net proceeds from her sale as well as injecting her own personal funds in lieu of the debt to achieve her value marker without obtaining a new loan from a lender. Linda is happy since she is able to afford the purchase herself without acquiring a new mortgage with interest payments. She was able to accomplish a 100% tax deferred exchange and now owns the new property outright.
COMMON OPTIONS FOR REPLACING DEBT:
Traditional Financing with a Lender
Private Money Loan
Seller Financing (Carry Back)
Cash