HELOC at closing of 1031 exchange?

5 Replies

I have a question about 1031 exchange financing.  I'm selling a building in a very hot market, and it's going to be difficult to find enough replacement property in time to meet the deadlines.

One strategy that I'm considering is to put extra down on the replacement properties and then get that money back with a HELOC. The purchase price of the replacement would be greater than the sales price of relinquished, as would the loan amount. The "extra" money paid down would use up all the proceeds from the relinquished property.

eg:

eg, if I found a replacement property for $600,000 and put 40% down:
loan = $360,000
down = $240,000

at closing, also get a HELOC of $90,000

Total loan = HELOC + Loan = $360,000 + $90,000 = $450,000
LTV after HELOC = $450,000/$600,000 = 75%

I would then draw on the HELOC later for renovations/other properties.

I talked to my mortgage person, and it's allowed from her perspective if the loans are simultaneous at closing.    Is this in violation of 1031 exchange rules?

Be very careful with this.  You need a 1031 specialist before attempting anything like that. It likely would be considered boot and would therefore be taxable

Very creative strategy! Looking forward to hearing replies.

Thanks Jeffrey, that was my hunch (that it would be boot).  I'd loop in an intermediary before proceeding, but am trying to pull a strategy together first.

@Greg Buenzli  Getting cash out of a property you then sell and 1031 would almost certainly be tagged as boot.  But refinancing after you complete your exchange is simply borrowing against the equity and is a common practice.  Complete the exchange and then get your helix.

Make sure you meet your debt replacement in the new property or you will have mortgage boot .....ie if the property you are selling is at 50% debt, you need to go in to a replacement at 50% debt or higher...or get creative with multiple properties at different debt amounts to average at 50% or higher.  You might benefit from talking to a strategist about what you ultimately want to accomplish so you fully understand your replacement options.  There are actually MANY ways to complete an exchange.  Give @Dave Foster a call to go over the exchange - that’s the first place to start.  He can help you get your numbers correct so you know what you need to look for.  It may be more simple than you think.  

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