1031 exchange question

[Sean Kruger]

Hello BP, 

I have a question regarding a 1031 scenario that the answer isn't perfectly clear to me and the ramifications of not spending all the money from a 1031 exchange.  I am going to round numbers to make it simple.  My thought is to sell a large property and buy two smaller ones.

Original purchase price: $200k

Depreciated value: $150k

Mortgage:  $175k

Net sale: $300k

Now if my plan was to buy 2 properties for $150k each, but for some reason I only find one suitable property to buy for $150k.  I use all the cash from sale $125k plus $25k from another source to buy the replacement for $150k.  Does this scenario wipe away any benefit from a 1031?  Or is a partial amount of my taxes owed due?

I understand I could make my life easy and buy a single property equal to or larger than the $300k, but I'd prefer not to do that and want to know what the ramifications of my above example would be.  As I understand it, I think I would owe capital gains on the full $125k profit and it would almost be like the 1031 exchange never happened, but again everything I read is rather vague.

Thanks in advance for all your help,

Sean