1031 exchange on a property with mortgage and heloc

Investor · Central NJ, NJ · Member since 2014 · 8 posts · 2 votes

Hi all. Got a fuzzy question i cant seem to get clarity on. I own an investment property that i have a primary mortgage on. I also recently got a heloc on the property but havent drawn down on it. I am considering a 1031 but already found the next property I want to buy. If I draw down on my heloc for the downpayment of the new property will the proceeds from the sale of my current place be allowed to payback the first mortgage and the heloc?

Thank you

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Angelique Barboa

Member since 2018 · 17 posts · 8 votes

@Dave Foster excellent advice

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Pat Daniels
Investor · Houlton, WI · Member since 2017 · 9 posts · 3 votes
5y
Thank you Dave. Based on your response using funds this close to selling could trigger an audit which I would prefer to avoid.
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Shane Brooks
Investor · Durango, CO · Member since 2019 · 33 posts · 4 votes
4y
Hello,
I have read a lot of your threads and would love some insight if you have some time regarding a 1031 of mine! My property is paid off but there is a rental line of credit that is tied to three properties (all on one deed in a second position). Is there any tax implications to payoff that LOC with the sale profit prior to the intermediary's taking the remaining funds and is that LOC treated as debt similar to a mortgage on the property?

Value: $585k

LOC: $320k

Shane Brooks
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
4y
@Shane Brooks, It sounds like the property you will be selling is one of the property's encumbered with the LOC. In that event the escrow company will have to satisfy that lien in order to provide good title to the buyer. So it would have to be paid off (or at least part of it paid off depending on how your lender prefers). Just like any other debt secured by a property.
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Shane Brooks
Investor · Durango, CO · Member since 2019 · 33 posts · 4 votes
4y
Thanks! So the LOC payoff doesn't fall under the boot classification - meaning capital gains taxes do not apply to lines of credits?
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Tyler Jackson
Member since 2021 · 1 post · 0 votes
4y
Hi, I'm new here and have a similar question.
Have a primary property with a HELOC
Purchased another property for 200k, used 60k from the HELOC on the other property and now looking to sell the 200k property for 350k.
My question is: I want to sell the renovated house for 350 and buy another property using a 1031. I also want to pay of the 60k that was used for renovations, will that get hit with tax in the 1031?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
4y
@Tyler Jackson
Yes you can use the exchange funds to do that but unfortunately the 60k that you take out of the exchange account to pay off the HELOC would be considered profit first and you will be taxed on it. If the HELOC was attached to the property you are selling then it would have to be paid off as part of the sale. And that would not be taxable. It would just reduce the amount of money you have in your exchange account.
A better answer might be to complete a 1031 exchange and then immediately refinance the new property. And use those proceeds to pay off the HELOC. You still have debt. But it is concentrated in your rental properties.
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David Underwood
Member since 2023 · 1 post · 0 votes
2y
@Dave Foster @Bill Exeter

I'm in a similar situation but have two properties I'd like to exchange into 1:

Property 1:

Debt Balance: $420k (1st lien) + $525k HELOC (2nd lien)
Value: $1.8M

Proper 2:
Debt Balance: $840k
Value: $1.3M

Let's see if I can answer my own question..

Exchange process:

1. Identify 3 like-kind properties (equal or greater): Assuming closing costs are 2% of sale price, the new purchase price would need to be equal to or more than the sale of Property 1 ($1.764M).

2. Complete the sale of the 2 properties and transfer to the qualified intermediary. Close on the new property within 180 days of closing of the last property closed (property 1 and 2 will probably close on different dates)

3. Total net proceeds to be used as down payment of new property is $1.316M.

4. What I'm not clear about is what's necessary in terms of old debt coverage on the 2 properties. Do I need to get a new loan/debt that would equal the sum of the prior debt ($1.26M)? Maybe I've misinterpreted what I've read on other forums.

Thanks for the advice!

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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
2y
Assuming that you meet all of the other requirements (trading equal or up in value and reinvesting all of your equity (cash)), the easiest way to look at it is your new debt will be the difference between the purchase price of your replacement properties less the equity that you are reinvesting.
You can also replace some or all of the old debt with new out-of-pocket cash if you like.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y
@David Underwood, You're awful close!
You'll want to think of these as two separate exchanges.
For exchange one - To defer all tax you must purchase at least 1.764 ish in real estate . Using all $850k ish of net cash. You got it!
For exchange two - To defer all tax you must purchase at least $1.3 ish (subtract closing costs) using all of the $460K of cash.
If you want to combine those exchanges you're absolutely right you have to meet the 45 and 180 day deadines for both exchanges. And to defer all tax you must purchase at least $3 mil ish in new real estate using all $1,279 ish mil in proceeds.

What this means is that there isn't a requirement for a specific debt coverage. Your responsibility is to purchase at least as much as your net sale ($3 mil ish). And to use all of the net proceeds (1.3 ish) to do that. And this is a big opportunity for you.
You can allocate those proceeds any way you want. You could take 800K and buy a property for cash. And then use the remaining 500K to purchase a property for 2.5 mil using the $500K as a down payment. This lets you eliminate some risk and concentrates your equity so you can access it easily at a different time if you find the perfect next property.
Concentrate all of the equity into one purchase greater than the aggregate of your sales. Or split the equity anyway you want to purchase multiple properties. It works great both ways.
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