I owe 120,000 on our house. Could I sell this house for 80,000 and roll over the other 40000 to another house were looking at buying. With the deal we are being offered on the house we are looking at buying we would end up owing about 110000.

You would not be able to do roll over the debt into a new purchase.  Your new loan to value (LTV) ratio will be based on the lessor of appraised value or purchase price and you cannot obtain cash out to pay other debts, including a previous mortgage.