Is debt paydown taxed in a 1031 exchange

[Melanie Carter]

I thought I had deferred all my taxes in a 1031 exchange this year, but am surprised by some news from my accountant today and want to get some perspective from all of you:

I sold a group of 3 rental properties this year for a combined, gross amount of $500K

At closing I paid a combined $200K in mortgage paydowns

I invested most the proceeds ($250K) in a 1031 (DST).

Properties I'm selling: Value is $500K, Debt is $200K, Equity is $300K. LTV is 40%

DST I'm buying: Value is $563K, Debt is $307K, Equity is $256K. LTV is 54%

I thought I had deferred all taxes since I had reinvested all the net proceeds into the DST

My accountant is telling me that I owe taxes on the $200K that was used for debt paydown.  He said I have to view the $200K as proceeds from the sale, just as they would be proceeds to a seller who had no mortgages.  Does this sound right to all of you?  I could have sworn that I wasn't obligated to pay taxes on the debt paydown, but could be mistaken.  This was my first 1031.

Thanks