Can I borrow more than I need on the replacement and keep the extra cash?

Surplus loan money paid to you at the purchase closing is cash received in the exchange

The closing that buys your replacement is funded by two sources: the wire from your intermediary and the lender's wire. If together they exceed the price and costs, the settlement statement shows cash due to the buyer, and that cash goes to you. Money is fungible on a settlement statement; nothing in it says which wire the surplus came from.

Section 1031(b) recognizes gain up to money received, and Reg. section 1.1031(d)-2 says cash received 'is not offset by consideration given in the form of an assumption of liabilities'. So the larger loan that produced the surplus does not shelter it. The general rule is on boot netting rules.

A loan taken out after the exchange is not income, because you have to repay it

The Supreme Court put the principle simply in Commissioner v. Tufts: 'When a taxpayer receives a loan, he incurs an obligation to repay that loan at some future date. Because of this obligation, the loan proceeds do not qualify as income to the taxpayer.' A cash-out refinance on property you already own is a borrowing, not a sale.

Section 1031 and Reg. section 1.1031(k)-1 contain no rule on how long after the exchange you must wait. The risk is factual: if the second loan was committed to before the purchase closed, priced on the purchase, or funded days later by the same lender, an examiner can argue the two loans are one, and the cash came out of the exchange.

Owners who want liquidity generally let the purchase close on ordinary terms and arrange any later borrowing on its own merits. Timing trade-offs are on refinance timing and the 1031 and pulling cash out after a 1031.

Worked example: $300,000 of surplus at closing versus the same $300,000 a year later

Hypothetical, round numbers, costs ignored; run your own numbers with your CPA. You sell a free-and-clear rental for $1,200,000 with an adjusted basis of $500,000, so realized gain is $700,000 and $1,200,000 sits with your intermediary. You buy a $1,500,000 replacement.

Version one: you borrow $600,000 at closing. With $1,200,000 from the intermediary that is $1,800,000 against a $1,500,000 price, so $300,000 comes back to you. Recognized gain is $300,000, the smaller of the cash and your realized gain, taxed first at up to 25% on the depreciation layer under Topic 409, plus the 3.8% net investment income tax above $250,000 joint or $200,000 single modified AGI.

Version two: you borrow $300,000 at closing, the minimum the price needs, and nothing comes back. A year later, on its own terms and its own appraisal, you refinance and draw $300,000. Nothing is recognized; the loan is repaid out of future rents or at sale, and when you sell, the higher debt payoff is part of your amount realized.

Refinancing the property you are selling is the other route, with its own questions

Some owners draw cash by refinancing the relinquished property before listing it. The higher loan is then paid off at the sale and has to be covered by new debt or added cash on the replacement, under the same netting rule. Whether a refinance shortly before a sale is respected is fact-specific; the comparison is on cash-out refinance versus a 1031.

Either way, the debt you were relieved of still has to be replaced, which is the subject of replacing the mortgage or adding cash.

Where a high-leverage trust changes the arithmetic

Our cash out DST page describes zero cash flow, high-leverage Delaware Statutory Trusts that can satisfy a large debt-replacement requirement using only a small portion of your proceeds, freeing the rest for lower-leverage investments. The trusts' debt is non-recourse, they pay no current income distributions, and the investor's invested capital is at risk.

That is a debt-sizing tool, not a way to receive cash inside the exchange: every exchange dollar still has to buy replacement property. How a trust's allocated loan counts toward your debt is on whether a DST's loan counts as replacement debt.