Does more debt on the replacement offset the cash I take out?

No, and the regulation says so in a single sentence

Example 2 of Treas. Reg. §1.1031(d)-2 spells the asymmetry out: "Although consideration received in the form of cash or other property is not offset by consideration given in the form of an assumption of liabilities or a receipt of property subject to a liability, consideration given in the form of cash or other property is offset against consideration received in the form of an assumption of liabilities or a transfer of property subject to a liability."

Read it twice, because the two halves point opposite ways. Cash out is untouchable; cash in is a credit against debt relief.

IPX1031 compresses the same regulation into working language: "a reduction in debt on the Replacement Property can be offset with additional cash from the Exchanger," but "increasing the debt on the Replacement Property cannot offset a reduction in the exchange equity."

Example 2 in the regulation: $40,000 taxed while the taxpayer's mortgage rose $70,000

The regulation's own figures make the point better than any modern example. D holds an apartment house with a $100,000 basis, a $220,000 value and an $80,000 mortgage. He transfers it and receives a building worth $250,000 subject to a $150,000 mortgage, plus $40,000 in cash.

D's debt went up by $70,000. His realized gain is $120,000, and the regulation concludes that "the amount of other property or money received by D is $40,000," so "$40,000 of the $120,000 gain is recognized."

Nothing about taking on a larger mortgage reduced that $40,000. The extra liability was consideration D gave, and it had no receipt of liability relief left to cancel.

The asymmetry follows from the statute, not from an anti-abuse rule

IRC §1031(b) recognizes gain "in an amount not in excess of the sum of such money and the fair market value of such other property" - that is, money and property received. Cash in your hand is received consideration by definition.

Liability relief only enters the same column because Treas. Reg. §1.1031(b)-1(c) deems it "other property or money." A liability you assume is the opposite: consideration given. It can cancel a deemed receipt of the same kind, and that is where its power stops.

So this is ordinary construction of the section rather than a trap laid for aggressive planning. What is boot sets out the wider framework the rule sits in.

A $1,500,000 sale where every other test passes and $100,000 is still taxed

Hypothetical, round numbers. You sell for $1,500,000, the buyer's funds clear a $600,000 mortgage, $90,000 of commissions and title fees come off the statement, and $810,000 reaches your intermediary. Net sale price: $1,410,000.

You buy for $1,410,000 with a new $700,000 loan and $710,000 from the exchange account, and take the remaining $100,000 home. Value matches at $1,410,000; debt is over-replaced by $100,000; and the $100,000 of cash is still recognized gain.

Asset Preservation's exchange equation makes the identical point at smaller scale: a $450,000 sale with $250,000 of debt replaced by a $600,000 purchase with $450,000 of debt produces "$50,000 of cash boot" despite the trade up in both price and leverage.

• Value test: passed - $1,410,000 of replacement against a $1,410,000 net sale price.
• Debt test: passed with room to spare - $700,000 of new debt against $600,000 relieved.
• Equity test: failed by exactly $100,000, and the boot equals that failure, not the net of all three.

The extra borrowing is not wasted: it covers the debt leg and lifts your basis

Taking on $700,000 against $600,000 relieved is what stops mortgage boot arising, so the loan is doing real work even though it does not shelter the cash.

It also moves basis. Under IRC §1031(d) the replacement takes your old basis, decreased by the money received and increased by the gain recognized, with liabilities counted on both sides - so a larger replacement loan generally supports a larger depreciable basis.

How to calculate basis in the replacement and how the replacement is depreciated follow the numbers from there.

Four variations exchangers try, and why each one lands in the same place

The rule is about the direction of the netting, not about the paperwork, so rearranging the borrowing rarely helps. Each of the variations below still leaves the retained cash in the received column.

• Borrowing against a different property you already own and keeping exchange cash: the new loan is outside the exchange entirely, so it offsets nothing; see can I pay down the mortgage on a property I already own.
• Taking the extra loan a week after the replacement closes but agreeing it beforehand: the loan is fine, but the cash held back from the exchange account was already received.
• Asking the intermediary to send the cash directly to a lender or a creditor: money applied at your direction is money received; paying off a HELOC or other loans with exchange funds draws the line between that and secured payoffs at closing.
• Buying a second, more leveraged replacement with the cash instead: that works, because the money goes into like-kind real property rather than to you - it is reinvestment, not netting.

The way to reach the same cash: finish fully invested, then borrow

Financing placed on the replacement after the exchange has closed produces loan proceeds rather than sale proceeds, and borrowed money is not income. The pulling cash out after a 1031 guide and the refinance timing guide cover how far apart the two events should sit.

A refinance wired at the same table as the purchase, arranged as part of the same negotiation, invites the argument that the loan was really part of the exchange consideration. Keep the purpose, the paperwork and the timing distinct, and ask your CPA or attorney to review the sequence before you commit.

Where the liquidity is the whole point of the sale, the leverage can also be built into the replacement itself: Breakwater's cash out DST pages describe a high-leverage zero cash flow structure that returns a large share of exchange value after the trust's refinance, with cash out DST explained covering the trade-offs.