The short answer
Equity in an exchange is the net cash from the sale of the relinquished property after the mortgage payoff and exchange expenses, the amount the qualified intermediary holds for you. To defer all gain you generally reinvest all of that equity and take on replacement debt at least equal to the debt paid off, or add cash to cover the shortfall. The reinvest-all-equity rule is a working rule that follows from the boot rules; the Code itself does not use the phrase.
At a glance
| Definition | Sale price minus loan payoff and exchange expenses |
|---|---|
| Working rule | Reinvest all equity and replace the debt paid off |
| Debt shortfall | Cured by adding your own cash |
| Cash taken out | Taxable boot that a bigger loan cannot offset |
The term is shorthand; the rule behind it comes from sections 1031(b) and 1031(d).
Neither section 1031 nor its regulations define equity. The rule follows from two provisions: section 1031(b) taxes money you receive, and section 1031(d) treats debt relief as money received.
That gives two tests. First, take no cash out, because cash received is boot. Second, replace the debt that was paid off, because Reg. section 1.1031(d)-2, Example 2, offsets debt relief only with debt you take on or cash you add, and never offsets cash you receive with new debt.
Publication 551 confirms the deferred-exchange version: liabilities paid off on the property given up reduce basis like money received, and new debt incurred on the replacement increases it. Publication 544 supplies the expense rule, since exchange expenses reduce the amount realized and so reduce the equity left to reinvest.
In practice that means two numbers to hit: spend all of the equity on replacement property, and match the debt that was paid off with new debt or added cash. Value alone is not the test; a pricier replacement can still leave boot if cash came out along the way.
In a hypothetical exchange, the same equity can be fully deferred or partly taxed.
Hypothetically, you sell for $2,000,000 and pay off a $700,000 mortgage, leaving $1,300,000 of equity with the intermediary. Closing costs are left out to keep the arithmetic plain; exchange expenses would lower the equity and the targets, and net boot explains how they are netted.
Buy a $2,000,000 replacement with the $1,300,000 and a $700,000 loan, and there is no boot. Buy a $1,800,000 replacement with the $1,300,000 and a $500,000 loan, and $200,000 of debt relief is unreplaced: mortgage boot of $200,000.
Buy a $2,100,000 replacement with $1,100,000 of the equity and a $1,000,000 loan, taking $200,000 out, and that $200,000 is cash boot even though your debt went up. Bringing $200,000 of your own cash to the second purchase instead would have cured its shortfall. Run your own numbers with your CPA.
It bites when equity is split off, spent at closing or left behind.
Common leaks are a payoff of other debts at closing, a return of the original down payment, and money left over after the last purchase. See paying off a HELOC with exchange funds, taking the original down payment out and leftover cash after an exchange.
Some owners place part or all of their equity in Delaware statutory trust interests; traditional DST solutions describes the structure, and whether a DST loan counts as replacement debt covers the debt side. The boot rules behind both are under mortgage boot and cash boot.
Related questions
Do I reinvest the whole sale price or just the gain?
Both the equity and the debt matter, not just the gain. Reinvesting only the gain leaves the rest as boot taxed up to your realized gain; see whether to reinvest the whole sale price or the gain.
Can I take some equity out and pay tax on just that part?
Yes. Section 1031(b) recognizes gain only up to the money and other property you receive, so the rest of the exchange can still qualify. The cash is taxed in the year you receive it.
Do exchange expenses reduce the equity I must reinvest?
Yes. Publication 544 subtracts exchange expenses from the consideration received, so costs such as commissions paid at closing reduce both the amount realized and the equity left to place.
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.