Can the buyer assume my low-rate mortgage in a 1031 exchange?

An assumed loan is money received, and Form 8824 puts it on the same line as cash

The regulation is blunt: an assumption or a transfer subject to a liability is 'other property or money' for purposes of §1031(b). Nothing in it turns on whether the loan survives, on its interest rate, or on who services it afterwards.

The Form 8824 instructions carry that into the return. Line 15 adds cash received, the value of unlike property received and net liabilities assumed by the other party, then reduces the total by your exchange expenses; line 20 recognizes gain up to the smaller of line 15 and your realized gain.

For a recourse loan the instructions set the test: a liability 'is treated as assumed by the party receiving the property if that party has agreed to and is expected to satisfy the liability.' A sale 'subject to' the mortgage without a formal assumption usually lands in the same place if the buyer is expected to pay it.

The 3% rate is an asset of the property, not of your exchange

A below-market loan can raise your price and widen your buyer pool, and those benefits show up in the contract. They do not show up in the debt-replacement test, where a $400,000 balance is $400,000 of relief whether it is assumed at 3% or wired off at par.

Whether the loan can be assumed at all is a question for your note and your servicer, not for the tax code; approval, an assumption fee and a release of your liability are all negotiated there. Ask for the release in writing, because an assumption without one leaves you on the hook for a loan on a property you no longer own.

There is also a settlement-statement detail worth catching early. When the buyer assumes the note, the balance is credited against the price rather than paid off, so the escrow shows a smaller disbursement to your intermediary than a comparable cash sale would. Make sure the exchange documents and the closing instructions describe the assumption explicitly, because the number your intermediary receives is the number you have left to reinvest.

Plan the tax side as if the loan were being paid off, then treat any price premium as upside.

Worked example: a $400,000 assumed balance, three ways to land it

Hypothetical figures rounded for clarity, with closing costs left out; your CPA or attorney should price your own version. You sell for $1,100,000, the buyer assumes the $400,000 note, and the intermediary receives $700,000. Your adjusted basis is $350,000, so the realized gain is $750,000.

Buy a $1,150,000 replacement with the $700,000 and a new $450,000 loan and there is no boot at all: the $450,000 assumed exceeds the $400,000 relieved, and nothing comes back to you. The full $750,000 stays deferred.

Buy a $700,000 building for all cash instead and the $400,000 of relief is unoffset. Line 15 is $400,000, line 20 recognizes $400,000, and the tax lands even though you never saw a dollar — the point of can I owe recapture with no cash.

• Third path: contribute $400,000 of your own money and buy an $1,100,000 property for cash. Example 2 of Reg. §1.1031(d)-2 subtracts cash paid from liability relief, so the boot is zero.
• Mixing works too: a $250,000 loan plus $150,000 of savings covers the same $400,000.
• Borrowing more never cures cash you pocket; that asymmetry is in taking a bigger loan on the replacement.

If keeping the 3% loan matters more than moving, do not sell at all

Borrowing against a property you keep is not a disposition, so there is no gain, no exchange and no deadline. A second lien behind the existing first, or a cash-out refinance that pays it off, are ordinary financing decisions that section 1031 never touches.

The danger is doing both. IPX1031 advises that 'the refinance transaction should be separate from the exchange sale or purchase transaction', and points to Fredericks v. Commissioner, T.C. Memo. 1994-27, where the taxpayer prevailed because the refinance 'had an independent business purpose' and 'was not entered into solely for the purpose of tax avoidance'. Pulling equity days before a closing invites the step-transaction argument that the cash was really exchange proceeds.

The full comparison is in cash-out refinance vs 1031 exchange, and the sequencing rules in refinancing before or after a 1031.

A second lien also keeps the property inside your estate, which matters if the plan was always to hold for the basis step-up rather than to redeploy the equity.

If you do sell, the replacement debt does not have to come from a bank

Trust-level financing is arranged by the sponsor and allocated to each beneficial owner in proportion to the interest purchased, so a trust carrying 50% leverage lets half of your replacement requirement be met by debt you never applied for. 1031 Crowdfunding describes the effect as taking on a share of trust debt without personally taking out a mortgage. No underwriting, no guarantee, no rate to negotiate.

When the balance you must replace is large next to the equity you are reinvesting — the usual shape after years of appreciation on a small, cheap loan — a zero-cash-flow offering is engineered for exactly that ratio, and our cash out DST page and the structure explained cover how the leverage is set.

That is the corner of this we occupy: brokering 1031 exchanges for twenty-plus years, over a billion dollars placed with vetted national DST sponsors, licensed nationwide within a regulated broker-dealer framework.

How to compare keeping the loan against exchanging out of it

Run both paths on after-tax cash flow, not on the interest rate. Keeping the property means the current net income plus whatever a new loan costs you, against a basis that is nearly depreciated out. Exchanging means a different income stream on the full sale price, with the entire gain still deferred.

Remember what deferral is. The tax is postponed, not cancelled, until you sell for cash or your heirs take a stepped-up basis; the mechanics are in is a 1031 tax-free or deferred and 1031 vs holding for the step-up.

Confirm the rates, the state treatment and any prepayment or assumption fee with your CPA or attorney before you commit to either side.