If I assume the seller's loan on the replacement, does it count toward the debt I must replace?

The regulation treats an assumed loan and a new loan the same way

Section 1031(d) treats debt the buyer of your old property takes off your hands as money you received. The offset runs the other way on the purchase: Reg. Section 1.1031(b)-1(c) nets 'consideration given in the form of an assumption of liabilities (or a receipt of property subject to a liability)' against the liabilities you shed.

The examples in Reg. Section 1.1031(d)-2 use exactly this fact pattern. A taxpayer gives up a building subject to an $80,000 mortgage and receives one subject to a $150,000 mortgage, and the regulation offsets the two, leaving only the cash received as boot.

So it does not matter whether the replacement debt is a fresh loan from your bank, the seller's existing note, or a share of a trust's mortgage. What matters is that you, the exchanging taxpayer, end up owing it or owning the property subject to it. Title and the loan have to sit with the same taxpayer that sold, which is the point of the same-taxpayer rule.

It offsets mortgage relief, but it cannot cancel cash you take out

The same example sets the limit: 'consideration received in the form of cash or other property is not offset by consideration given in the form of an assumption of liabilities.' Cash you add on the purchase can cover debt relief, but debt you take on cannot cover cash you pull out.

That is why an assumption is a debt-side answer only. If you also kept $50,000 from the sale, a larger assumed loan will not shelter it; whether more debt offsets cash taken out works through that rule.

The Form 8824 instructions carry the netting into the return. Line 15 picks up net liabilities assumed by the other party, which is the excess of the debt you shed over the liabilities you assumed plus cash you paid. Line 18 adds 'any liabilities you assumed' to the basis side.

Worked example: a $500,000 assumed loan against a $600,000 payoff

Hypothetical, round figures, closing costs ignored. You sell for $1,500,000, the closing pays off your $600,000 mortgage, and $900,000 reaches your intermediary. The replacement costs $1,600,000 and the seller has an assumable $500,000 loan.

Path one: you assume the $500,000 and pay the other $1,100,000 with the $900,000 of exchange funds plus $200,000 of your own cash. Relief of $600,000 is offset by $500,000 assumed and $200,000 paid, so net liabilities assumed by the other party are zero and nothing is recognized.

Path two: you assume the $500,000, pay $900,000 from the exchange, and the seller agrees to a $1,400,000 price. Relief of $600,000 against $500,000 assumed leaves $100,000 of mortgage boot, taxed up to your realized gain. A new $100,000 second loan or $100,000 of your own cash closes the gap. Run your own numbers with your CPA.

Get the lender's consent and price the assumption fee before day 45

A low-rate loan is only assumable if its lender agrees. Federal law lets a lender 'enter into or enforce a contract containing a due-on-sale clause', and the exercise of that option is 'exclusively governed by the terms of the loan contract' under 12 U.S.C. Section 1701j-3. Taking title subject to the loan without consent invites acceleration, which would force a refinance on someone else's timetable.

Lender approval takes time, and your identification and closing deadlines do not move for it. Start the application as soon as the contract is signed and keep a second replacement on the identification list in case approval stalls.

Assumption fees are a cost of borrowing. Publication 551 lists loan assumption fees among closing costs you cannot add to the property's basis, and for business property says such costs are capitalized and deducted over the period of the loan. Whether paying them from exchange funds creates boot is covered in loan fees and points paid from exchange funds.

When no assumable loan is on offer, a trust's debt does the same job

Rev. Rul. 2004-86 treats a beneficial owner of a Delaware statutory trust as owning a fractional interest in the trust's property, and the trust's loan in the ruling is non-recourse to the owners. Your share of that loan is debt you take the property subject to, so it offsets relief the same way an assumed note does; does a DST's loan count as replacement debt shows the arithmetic.

That can be useful when the assumable note is smaller than the debt you shed. A small trust subscription identified alongside the building can carry the difference without a second application. Traditional DSTs come with their financing already in place.