The short answer
Yes, to the extent equity is left over. A fully deferred exchange has to pass two tests at once: the replacement must cost at least as much as the net sale price, and every dollar of net proceeds held by your intermediary must go into the purchase. A bigger loan satisfies the first test and the debt side of the second, but any exchange cash it leaves unspent is paid to you after the exchange ends and is taxed as boot up to your realized gain. The extra borrowing does not offset that cash. The fix is to size the loan to the cash, not the other way around.
At a glance
| Value test | Replacement price at least equal to the net sale price |
|---|---|
| Equity test | All net proceeds held by the intermediary spent on replacement property |
| Debt test | Debt paid off covered by new debt or cash you add |
| Bigger loan does | Cover the debt test and raise basis |
| Bigger loan does not | Offset any exchange cash left over |
| Leftover equity | Released after the exchange period and recognized up to realized gain |
| 2026 15% band | Ends at $613,700 of taxable income joint, $545,500 single |
Matching the price is one test; spending all the equity is the other, and the loan only helps with the first
The price target and the equity target come from the same rules. Form 8824 line 15 counts cash you received in full, then adds any net debt relief. Buying at equal value with more debt drives the debt piece to zero, but cash you received is still on the line.
Reg. section 1.1031(d)-2 explains why: 'consideration received in the form of cash or other property is not offset by consideration given in the form of an assumption of liabilities'. The detailed reasoning is on whether more debt offsets cash taken out; the planning point is that you cannot borrow your way out of unspent equity.
The equity you do not spend stays with the intermediary until the exchange ends, then reaches you as boot
Your intermediary cannot release the surplus early. Under Reg. section 1.1031(k)-1(g)(6), once you have identified property you get the money only after receiving everything you are entitled to acquire, or after a qualifying contingency. In practice that is often day 181.
The tax, though, belongs to the exchange. The amount is recognized up to your realized gain, normally in the year of the sale; what happens to the remainder, and the late-year installment rule, is on leftover cash after the exchange.
Worked example: a $2,000,000 sale, a $2,000,000 purchase and $400,000 of boot
Hypothetical, round numbers, costs ignored; run your own numbers with your CPA. You sell for $2,000,000 with an adjusted basis of $800,000 after $300,000 of depreciation. A $600,000 mortgage is paid off and $1,400,000 goes to your intermediary. Realized gain is $1,200,000.
You buy a $2,000,000 replacement and the lender offers 50% leverage, a $1,000,000 loan. Only $1,000,000 of exchange cash is needed, so $400,000 is left. Debt relief of $600,000 is more than covered by $1,000,000 of new debt, so the debt side is zero, but line 15 shows the $400,000 cash, and $400,000 is recognized.
Under Topic 409, the first $300,000, matching your depreciation, is unrecaptured section 1250 gain taxed at up to 25%, about $75,000. If the other $100,000 falls in the 15% band, which for 2026 ends at $613,700 of taxable income for joint filers under Rev. Proc. 2025-32, that adds $15,000. The 3.8% net investment income tax above $250,000 joint modified AGI could add up to $15,200, so roughly $105,000 federal before state tax.
Ask the lender for a $600,000 loan instead and all $1,400,000 of equity goes into the building. New debt still equals the debt paid off, and nothing is recognized.
Set the loan amount from the exchange balance before you sign the commitment
The order of work matters. Get the exchange balance from your intermediary, subtract it and your closing costs from the price, and apply for that loan amount, not the maximum the lender will offer. If the lender has already issued a larger commitment, ask for a reduced amount before closing; the replacement settlement statement should show the full exchange balance going in.
Paying the extra cash onto the new loan after closing does not help. Money used to reduce a loan is not spent on like-kind property; see paying down a mortgage with exchange proceeds. How lenders treat exchange funds as a down payment is on a mortgage using exchange funds as the down payment.
If you want the leverage and the deferral, buy more property with the spare equity
Keeping the bigger loan is possible if the spare equity buys more replacement property: a higher-priced building, a second identified property, or a Delaware Statutory Trust interest named on your identification list and sized to the remainder. Trust interests are illiquid, carry sponsor, lender and tenant risk, and pay only what the property earns; see splitting an exchange between a DST and direct property and traditional DSTs.
Related questions
If my replacement costs more than my sale price, can I still have boot?
Yes. Price is only the value test. Any exchange cash not used to buy replacement property is cash received, whatever the price.
Does taking on more debt than I paid off count for anything?
It satisfies the debt test and increases your replacement basis, but it never offsets cash you receive.
Can I use the leftover to pay the lender's fees?
Lender charges are not exchange expenses, so paying them from exchange funds is treated as cash to you; see loan fees and points.
When will the intermediary pay me the leftover?
Usually after the exchange period ends, unless you have received everything you identified or a written contingency outside your control occurs.
Is it ever sensible to keep some equity out?
Some owners take a deliberate, modest boot to fund reserves and pay the tax; the trade-offs are in intentional boot.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.