The IRS considers debt reduction (when not replaced with additional equity in a new prop) to be the same as cash in terms of its benefit to you, so you would be taxed on the $125k you didn't roll over.If you don't want to carry a mortgage on a new property, you could sell, use $125k to pay off your current loan, and then put in an additional $125k of your own cash to make up the difference, resulting in $325k of equity in the new property/properties, and meeting both the equity and total value rules.So the short answer is YES, it is allowed for you to go from a $325k property to a $200k property while paying off your $125k loan, BUT you will pay taxes on the amount you don't roll into the new property ($125k).

@Jon Dorsey The 'environment' does not change business fundamentals.Parks with POH are two separate business: one is the MHP, which generates revenue and expenses from the operation of the park; this has its own value and risk profile.

Whenever I read about lease options I always wonder...How do you minimize the risk of not being able to find a person for a sub lease?  

@Paul Boyett, in my opinion, it depends on your financial situation and risk tolerance. 

general insurance and you can get say an 1 million umbrella for very cheap.. although frankly landlording has limited risk as long as your not slumlording.

What are some of the risks? 

I knew it was going to be a calculated risk, but due to the cost savings I was willing to roll the dice. 

Rapidly grow portfolio and maximize leverage, but mitigate risk, build durability and avoid pitfalls.

He is going to have some risk to get the big loan, that's why the bank is lending to you! 

I don't know if you could make enough profit and still have enough to make the investor's risk verse return worth it.