How to pay off borrowed downpayment when doing a 1031 exchange

[Peter Bronk]

I purchased a four unit building early this year.  Part of the down payment was borrowed using a 2nd mortgage against another building, so my real equity is lower than the building value less the 1st mortgage.  Financials look like this: Value of property: $950,000.  1st mortgage $665,000.  2nd mortgage (other building, used for down payment) $200,000.00 My Actual Cash Equity: $85,000.

In the next couple years, I would like to condo the building (creating additional value), 1031 exchange the units, and pay off both the 1st and 2nd mortgage at the same time.    The bank is willing to add this building as collateral on the 2nd mortgage, in effect showing $865k financing on the property.

Question 1: Will the 2nd mortgage, blanked on both properties, be treated the same as the 1st mortgage at the time of the exchange?

Question 2: If yes to question 1, are there any time requirements as to how long a mortgage must be in place prior to an exchange so that the payoff is not considered a taxable event?  For example, if someone does a cash out mortgage (reducing equity) one week before an exchange, will the fact that the mortgage was recent create a taxable event if only the reduced equity goes into the acquired property?