 For an exchange to be tax free, you must do two things: (1) reinvest all of the cash, and (2) buy equal or up. For example, if your old property has an unpaid mortgage balance of $40,000 and you sell it for $100,000, the balance of $60,000 will go into your exchange account (our example ignores closing costs, real estate commissions, etc.).
For this exchange to be tax free, you must spend all of the $60,000 in the exchange account and buy a new property of $100,000 or more. The difference between the purchase price and the $60,000 in the exchange account can be funded by a new loan, by cash from your savings account or by some combination of the two (a new loan of $20,000 and cash from savings of $20,000 for example).
If you buy the new property for $100,000 but only use $55,000 of the cash, you will pay tax on $5,000. Likewise, if you use all of the $60,000 of exchange cash but buy a new property for only $95,000, you would still pay tax on $5,000.
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