How is a partial 1031 taxed?

[Lori F.]

I was planning to buy 2 replacement properties as part of a 1031 exchange. Now one of the replacement property purchases may fall through. 

How would taxes be computed on a partial exchange, where I would be buying down in price (by about $200k) and then either A) taking a smaller mortgage than I had on the relinquished property and using all the sales proceeds or B) taking a larger mortgage but generating cash at closing? 

I guess what I'm asking is if it's possible that I'd have to pay taxes on the price difference plus the mortgage boot plus the cash boot.

[Bill Exeter]

I wanted to jump in here any make some follow-up comments.  There are some good potential solutions discussed here.  The one point that I wanted to make sure was understood is that the improvements, whether paid before, at or after closing must be paid under the control of the Qualified Intermediary and the corresponding improvements must be completed before you take title to the property in order to be counted as "real property" for like-kind property requirements and qualify for tax-deferred exchange treatment.  Payments merely made to a vendor or items credited in/through escrow/closing do not qualify as real property unless the corresponding improvement have also been completed.