Can you assume a loan in a 1031 exchange?

Hans Goldstein structures installment sales for sellers and works alongside their CPAs and brokers. Email hans@goldsteinco.net or call 213-414-2808.

Why are there two different questions?

People ask "can I assume a loan in a 1031" and mean one of two things:

1. Can my buyer take over my loan? That is about the building you are selling.
2. Can I take over the loan on the building I am buying? That is about the replacement.

The tax rule is the same for both. To defer all the gain, the debt on the replacement (plus any cash you add) has to be at least the debt that came off the property you sold. Debt relief you don't replace is boot, treated as money received (Treas. Reg. §1.1031(d)-2-2), Example 2). Recognized gain is the lesser of your realized gain or your net boot (IRC §1031(b)). Which loan gets assumed decides whether the assumption helps you meet that rule.

Can the buyer assume your loan?

Rarely. Commercial notes almost always carry a due-on-sale clause, and the Garn-St Germain Act, 12 U.S.C. §1701j-3, makes those clauses enforceable. Its exceptions cover certain transfers of homes, not commercial sales. So the lender decides. Some agency and CMBS loans allow an assumption with lender approval and a fee. Most bank loans simply get paid off.

Even when it works, a buyer assumption does not fix your 1031 debt math. For the netting, a loan the buyer takes over is debt relief, exactly like a loan paid off at closing. You still have to carry that much debt on the replacement, or add cash.

What a buyer assumption can do is avoid your prepayment charge. On the deal on my desk (rounded, illustrative): a $2.1 million loan taken out seven months before the sale. On a 5-4-3-2-1 step-down it is still in year one: $2,100,000 x 5% = $105,000 to pay it off. If the buyer took the loan over instead, that charge might not apply, though the buyer pays an assumption fee and has to want your rate and terms. If you go this way, get a written release of liability from the lender. Without it, you may stay on the hook for a loan on a building you no longer own.

Can you assume the replacement property's loan?

Yes, when that loan allows it and the lender approves you. This is the assumption that helps. Debt you take over on the replacement counts as debt you take on, and it offsets the debt that came off your old building. If that loan was written before rates rose, you also get its older rate for the rest of its term.

The process: the replacement's seller asks their lender, you apply as the new borrower, and the lender underwrites you much like a new loan. Expect a fee, legal costs and weeks of review. Start at identification. It all has to close within 180 days of your sale, with the replacement named within 45.

How the numbers work on the deal on my desk

Illustrative. You sell the office building for about $4.0 million with a $2.1 million loan paid off at closing, leaving about $1.9 million of equity at the QI. Selling costs are ignored to keep it simple. Three possible replacements, each with an existing loan you could assume:

• A: $2.3 million assumed is more than the $2.1 million relieved. No boot. The extra $200,000 of debt costs you nothing in tax terms.
• B: $1.6 million assumed leaves $500,000 of debt relief uncovered, but you add $700,000 of your own cash. Cash paid in offsets debt relief, so no boot. You needed outside cash, though.
• C: $2,100,000 minus $1,600,000 = $500,000 of debt relief not replaced. That is boot, taxed this year. Taking out a bigger loan elsewhere would fix it; taking cash out would not, because a bigger loan does not cancel cash you take out.

Now the rate. Say Replacement A's assumed loan carries 4.5% and a new loan would cost 7.0% (both illustrative, interest-only for simplicity):

Against that, assume an illustrative $25,000 assumption fee plus lender legal costs. The lower rate wins quickly, as long as the remaining term is long enough. A loan that matures in two years puts you back in the refinance market soon.

What are the other ways to keep from taking a brand-new loan?

The market as of October 2026

• New loans cost more than older ones. As of Oct. 1, 2026, Northmarq quoted 10-year Freddie Mac loans at 6.30% to 6.45%, life company loans at 6.65% to 6.95% and CMBS at 7.00% to 7.50%. The 10-year Treasury was 5.24% on Oct. 1, 2026 (FRED, DGS10).
• Loans written earlier this year carry lower coupons. As of June 2026, CRED iQ found 2026 CMBS coupons of 5.64% for multifamily, 6.33% for industrial and 6.50% for office. Those were set when the 10-year was well under 5%. That gap is why an assumable loan on a replacement can be worth chasing.
• Many loans are near maturity. The Mortgage Bankers Association, Feb. 9, 2026 counted $875 billion of commercial and multifamily mortgages maturing in 2026, 17% of the total. Check the maturity date before you count on an assumed rate.

What if the debt math still doesn't work?

Sometimes nothing fits: no assumable loan on a building you want, no cash to add, and a new loan that costs more than the building earns. Two other routes:

• A structured installment sale. The buyer pays in full, your old loan is paid off at closing (a year-one payment, taxed in year one), and the rest of the gain is reported as payments arrive. No replacement, so no new loan. Payments are locked in once set, depend on the assignment company and the insurer behind it, and have no published IRS ruling on this specific structure, so your CPA should review it. A commission (about 4% of the amount structured, paid by the insurer) is built into the pricing. See what a structured installment sale is.
• A partial exchange. Buy a replacement with less debt, accept some boot, and structure the cash you take out. See the 1031 and installment sale together.

Run the exchange and the alternatives with your own numbers in the advanced calculator, or send Hans the deal and he will lay them side by side for your CPA.

Frequently asked

Q: Does a loan I assume on the replacement count toward replacing my debt? A: Yes. Debt you take over on the replacement counts as debt you take on, and it offsets the debt relieved on the property you sold. Your QI and CPA should confirm the closing statement shows it that way.

Q: If my buyer assumes my loan, do I still need debt on the replacement? A: Yes. A loan the buyer takes over is debt relief to you, the same as a payoff. To defer all the gain you still carry that much debt on the replacement, or add cash.

Q: How long does a loan assumption take? A: It depends on the lender, and it involves underwriting you as the new borrower. Plan for weeks, and start when you identify the property, because it must close within 180 days of your sale.

Q: Can the replacement's seller finance part of my purchase? A: Yes, if they agree. The note you sign to them counts as debt you take on in the exchange. Have your QI and attorney paper it before closing.

Q: Can I take cash out and make up for it with a bigger assumed loan? A: No. A bigger loan does not cancel cash you take out. The cash you receive is boot either way. See 1031 exchange boot tax.

What should you read or run next?

• 1031 boot calculator
• Advanced calculator
• Do I need a new loan for a 1031?
• The 1031 debt replacement rule
• Prepayment penalty when selling for a 1031
• 1031 boot case studies

Who wrote this?