Do You Have to Reinvest All Proceeds in a 1031 Exchange?

The Two-Condition Test

The classic mistake: "I sold for $1M with a $400k gain, so I only need to reinvest $400k." Wrong — reinvest less than the full net sales price and the shortfall is taxed as boot. The gain-only math is the single most common way exchanges spring a tax leak.

Going up in value is fine and normal: exchange proceeds plus new financing buys a larger asset, and the full gain rides along deferred.

• Buy replacement property equal to or greater in value than the NET SELLING PRICE of what you sold — not just the gain
• Move ALL the equity from the old property into the new one

I want some cash for reserves — bad idea?

It's a choice, not a mistake. Keep $100k out and you'll pay tax on $100k of gain; the rest stays deferred. Just decide before closing.

Does replacing the mortgage count as reinvesting?

You need to replace the VALUE, not the specific loan — new debt, extra cash, or both can fill the gap left by the old mortgage.

What about closing costs?

Standard transactional costs (commissions, title, QI fees) reduce your net selling price — the target you have to match. Your QI runs the exact number.