Is this a Possible 1031 Strategy?

Question

Thinking about how to best structure a 1031....

Loan balance: $125K...... Est net sales price( after all closing cost ) $310K

Est net proceeds: $185K.... This would be the amount to roll over into 1031 and put towards next property

I currently have a HELOC on the property for $90K.......... Here is my thought / question

If I was to withdraw the HELOC before the sale of the house that would count as debt/ 2nd mortgage on the house right? Which debt is non taxable. Leaving the net taxable sales proceeds of $95K to 1031

Does that make sense or am I off and missing something?

Dave Foster · Answer

Account Closed, Yes, any tax paying entity can do a 1031 exchange.  An LLC taxed as an s corp is a tax paying entity of it's own.  So the LLC can sell and the LLC has to do the 1031 and purchase the new property.  No problem.

Account Closed · Answer

Does a property in a LLC taxed as an S Corp benefit from a 1031 ?

Phil Deshay · Answer

Ok thanks Dave.

Dave Foster · Answer

@Todd Mason, Yep, like @Jon Taylor said,  Debt doesn't have anything to do with taxation on your sale.  Your gain is determined by the difference between your net sale ($310K) and your adjusted cost basis (purchase price minus depreciation plus capitalized improvements).

And accessing debt right before a sale and 1031 as @Wayne Brooks said can result in the IRS interpreting that you were accessing profit ahead of the sale.  This is because your requirement to defer all tax is to purchase at least as much as your net sale ($310K) and use all of the cash proceeds ($185K).  If you access debt so you have less proceeds to go forward the IRS can interpret that as a form of taking profit.

However, if you complete a full 1031 exchange and purchase at least $310K using $185K in replacement real estate you can immediately do a cash out refinance.  That is perfectly fine.  As a matter of fact a lot of our clients will purchase a small property for cash say $150K and then use the remaining $35K as a down payment on a$160K property.  This covers their requirements.  And it leaves them with a free and clear property they can then take financing out on.

Todd Mason · Answer

@Dave Foster that’s an awesome explanation! Thank you so much for the clarification it sounds like a good plan! Are you able to be the intermediary across the country?

Todd Mason · Answer

@Wayne Brooks @Jon Taylor thank you both. Yeah I’m not too familiar with the 1031 and this would be my first so very thankful with the help and pointing out the do’s and don’t. I knew there had to be something I was missing!

Jon Taylor · Answer

@Todd -

I think the heart of your strategy question is based a slight misunderstanding of the 1031 rules.

You must replace the total value of what you sell with the net proceeds from the sale.

You can replace debt with debt, or equity.

You are taxed on your capital gain in addition to depreciation recapture with no regards to your loan to value at the point of sale.

Wayne Brooks · Answer

Refinancing just prior to a 1031 is a no no.

@Dave Foster can give you the skinny.

Dave Foster · Answer

@Phil Deshay, This would be more of a divorce attorney question.  CA is a joint property state so you'd need to be careful about separating interests.  The IRS honors divorce decrees.  But there should be nothing to keep either of you from 1031ing your joint interests in a sale as long as there was documented agreement.

Phil Deshay · Answer

Is it possible while going through a divorce in California to do a 1031 exchange with only my portion of proceeds from the sale our investment property? We are both listed on the title.

Is this a Possible 1031 Strategy?

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