Do I have to replace the debt on the property I sold, not just the equity?
Effectively yes. To fully defer, your replacement property's price must equal or exceed what you sold, and debt paid off at sale must be offset by new debt or fresh cash on the purchase. Sell a farm with a $400,000 mortgage and either borrow $400,000+ on the new one or bring that much new cash.
The rule is often stated as "replace the debt," but the mechanics are about value and equity. If you sold for $1.5M with a $500,000 loan, full deferral requires buying at $1.5M or more and reinvesting all $1M of net equity. The $500,000 gap can be filled with a new loan, your own additional cash, or a mix — the IRS does not care which.
This is where exchanges quietly become financing problems. The exchanger has 100% of the equity locked with the intermediary but needs a loan to cover the debt-replacement gap, on a rural asset, inside a hard deadline. Conventional ag underwriting — tax returns, global cash flow, committee approval — routinely takes 60–90 days. The exchange math is easy; the loan timeline is the hazard.
Cash can always substitute for debt, but debt cannot substitute for equity. Pulling equity out and replacing it with a bigger loan creates boot. Run the numbers with your CPA before you write the identification letter.
The Turnrow angle
Turnrow exists for exactly this gap: up to $1.5M and 70% LTV against the replacement property, no tax returns or financials, closing in 2–4 weeks so the debt-replacement leg never becomes the reason an exchange fails.
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