Do I have to reinvest the whole sale price, or just my gain?

The number to replace is the sale price, and your gain plays no part in it

Section 1031 defers gain; it never tells you what to buy. The size test falls out of the boot rules instead, because anything of value you receive and do not carry into like-kind real property is "other property or money" under IRC §1031(b) and is taxed on this year's return.

Working backwards from that, the practical target is the whole net sale price. IPX1031's 2026 misconception list opens with exactly this belief - "I only have to reinvest my gain, equity or basis to fully defer taxes" - and answers that all net proceeds must be reinvested and the replacement must equal or exceed the value of what was sold.

Old Republic Exchange puts it as a question with a one-word answer: "May I take out my basis and reinvest only the gains?" - "No. Both basis and gains must be reinvested to defer taxes."

Net sale price means the contract price after the closing items the exchange may pay

The value you must match is measured after transactional costs, not before. Legal 1031 frames the first step as buying "replacement property of equal or greater value to the relinquished property (less allowable closing costs)."

Which costs belong in that subtraction is not open-ended. Treas. Reg. §1.1031(k)-1(g)(7)(ii) describes them as items that "appear under local standards in the typical closing statements as the responsibility of a buyer or seller (e.g., commissions, prorated taxes, recording or transfer taxes, and title company fees)."

Lender charges on the replacement sit in a different category and can behave differently; see which closing costs can be paid from exchange funds and do loan fees and points count as boot.

A $1,000,000 sale, three tests, and the exact figure each one produces

Hypothetical, round numbers: you sell for $1,000,000, the buyer's funds clear a $420,000 mortgage, and $60,000 of commissions and title fees come off the settlement statement. Your net sale price is $940,000, and $520,000 of net equity reaches the qualified intermediary.

Full deferral now means buying at least $940,000 of replacement real estate, spending all $520,000 of the exchange account on it, and covering the $420,000 of debt you shed with a new loan, with money from outside the exchange, or with both together.

Suppose your adjusted basis was $310,000, so the realized gain is about $630,000. Buying a $630,000 replacement "to cover the gain" would leave you roughly $310,000 short on value and would put that same $310,000 on this year's return - the opposite of what the exchange was for.

• Value: $940,000 minimum purchase price, measured on the price of the replacement, not on the cash you put into it.
• Equity: all $520,000, including the part that is simply your own original money coming back - see can I take my original down payment out tax-free.
• Debt: $420,000, replaced in any form and from any lender, which is the subject of replace my mortgage or add cash.

Equity and debt are tested separately, so passing one and missing the other still costs you

Asset Preservation's exchange equation shows the first trap in round numbers. A $450,000 sale carrying $250,000 of debt and $200,000 of equity, replaced by a $600,000 purchase with $450,000 of debt, is a clear trade up in value and still produces "$50,000 of cash boot" because only $150,000 of equity went in.

The reverse fails just as cleanly. The same $450,000 sale replaced by a $350,000 purchase with $150,000 of debt puts all $200,000 of equity to work, yet the owner "reduced the debt by $100,000 (mortgage boot) which results in a recognized (taxable) gain of $100,000."

Both legs have to clear on their own. Does a bigger loan offset cash I keep explains why the first of those two failures can never be patched by borrowing more.

Missing the target does not void the exchange - it turns it into a partial one

Nothing collapses if you come up short. The gap is boot, taxed up to your realized gain, and the remaining gain still rides into the replacement property's basis under section 1031(d).

That makes the decision a pricing question rather than a pass-or-fail one. An exchanger who is $80,000 short is choosing to pay tax on $80,000, not to lose the deferral on the other $550,000.

What you cannot do is fix it after closing. The value, equity and debt figures are fixed by the settlement statements, so run them past your CPA or attorney before you sign the purchase contract.

• The gap is measured on whichever leg fails: short on purchase price, short on equity deployed, or short on debt replaced, and the legs are not averaged against each other.
• Boot from a shortfall is capped by realized gain, so an owner whose basis is close to the sale price may find the taxable figure smaller than the gap itself.
• A shortfall discovered in the last week before day 180 is usually fixable only by adding value, which is why exchangers keep a fractional interest on the identification list.

The last slice is where exchanges leak, and a fractional interest is what absorbs it

Buildings come in whole numbers. An owner who needs $940,000 of value and finds an $880,000 property is $60,000 short and will be taxed on it unless something takes up the difference.

A fractional interest can be bought to the dollar, which is why exchangers pair a direct purchase with a Delaware Statutory Trust interest sized to the remainder. The DST 1031 guide explains what that interest actually is, and splitting an exchange between a DST and a direct purchase covers the mechanics.

The same technique works on the debt leg, because a trust's non-recourse loan is allocated to investors pro rata; can a DST's loan count as replacement debt sets out how that is measured.