How do I match my old mortgage exactly with DST debt?

Replacing debt means matching two numbers, not one

To defer all the gain, the replacement must be worth at least what you sold and must carry at least as much debt as you shed, unless you add cash. Reg. section 1.1031(d)-2 treats a liability you are relieved of as money received, offsets it by liabilities you take on, and allows "consideration given in the form of cash" to offset it as well. The reverse is not allowed: taking on more debt never offsets cash you receive.

The Form 8824 instructions walk through the same netting on line 15. Whether a trust's loan counts as your replacement debt at all is covered in does a DST's loan count as replacement debt; this page assumes it does and deals with sizing.

The leverage ratio tells you how much debt each dollar buys

If a trust's loan is a given percentage of its total capitalization, each equity dollar carries debt equal to that ratio divided by one minus the ratio. At a hypothetical 50% ratio, $1 of equity carries $1 of debt; at 40%, about $0.67; at 85%, about $5.67.

Use the debt figure in the offering documents, not a rounded marketing number. Ask the sponsor for your allocated share of the loan per dollar invested, because the ratio may be quoted against purchase price or against total capitalization including offering costs, and the two give different answers.

The loan is fixed once you close. The trust approved in Rev. Rul. 2004-86 could not "renegotiate the terms of the debt" or accept new contributions, which is why the number you size against today is the number you get.

Worked example: an $800,000 payoff matched three ways

Hypothetical, round numbers, closing costs and offering loads ignored, leverage ratios invented for illustration; run your own numbers with your CPA. You sold for $2,000,000 and paid off an $800,000 mortgage, leaving $1,200,000 with the intermediary. You need $2,000,000 of value and $800,000 of debt.

• One trust at a 40% ratio: $1,200,000 of equity carries $800,000 of debt and $2,000,000 of value. Exact, but only if such a trust exists and fits your goals.
• A 55% trust plus a debt-free trust: $655,000 in the leveraged trust carries about $800,600 of debt; the other $545,000 goes debt-free. Value is about $2,000,600.
• A high-leverage trust plus low or no leverage: at an 85% ratio, $142,000 of equity carries about $804,700 of debt, leaving $1,058,000 for debt-free or lightly leveraged trusts. Value is about $2,004,700.
• Falling $20,000 short on debt in any of these is cured by adding $20,000 of your own cash; leaving it uncured makes $20,000 taxable.

Our high-leverage cash out trust is built for the third option

Our cash out DST is a zero cash flow trust: high leverage, long-term net leases, non-recourse financing, and all operating income applied to the loan, so investors receive no current distributions and are paid on sale. Because it is highly leveraged, it can cover a debt requirement with a small part of your proceeds and leave the rest for lower-leverage investments.

That trade has costs. No income arrives while the loan is paid down, and leverage magnifies losses as well as gains; read DST leverage and interest-rate risk and zero cash flow DSTs explained before deciding. When a debt-free trust is the better home for the remainder is covered in debt-free DSTs and when to use one.

Lock the allocation before day 45 and confirm it before funding

Every trust you plan to use must be on your identification list by day 45, and the 200% rule counts each one's value. Name the leveraged trust and the debt-free trust together.

Before you fund, get each sponsor's written statement of the loan allocated to your subscription amount, and give your CPA the totals for line 15 of Form 8824. If a trust closes out before you fund, your debt plan changes with it, so keep a second leveraged option on the list.