1031 exchange mortgage note

[James Dolhancryk]

What happens to mortgage note during 1031 exchange.

Im thinking old is paid off, but looks like entire sale transfers.

Therefore do I need to acquire a new mortgage for my present debt ?

[Dave Foster]

@James Dolhancryk, If you want to defer all tax you need to purchase at least as much as your net sale (contract price minus closing costs) and you need to use all of the net proceeds from the sale (the net sales price minus any mortgage payoff).  

Any mortgage secured by a property being sold will generally have to be paid off in full for the title to convey.  And that still leaves you with the two reinvestment requirements.  You don't specifically have to replace that mortgage.  You can. bring in cash from any other source.  Most people don't have excess money so they end up replacing the mortgage in the replacement property.

A second option depending on how much gain you're deferring would be to do what is called a partial exchange.  You can purchase less than your net sale which would reduce any replacement mortgage.  You'll pay tax on the difference between the net sale and the actual purchase.  But you'll still shelter any remaining gain in the 1031.