Buying & Selling Real Estate Discussion

User Stats

578
Posts
173
Votes
Eric Black
  • Rental Property Investor
  • Where we are parked
173
Votes |
578
Posts

1031 Exchange with HELOC

Eric Black
  • Rental Property Investor
  • Where we are parked
Posted May 26 2017, 19:33

Hi all. Sorry if this sounds repetitive as I've read a lot of other 1031/HELOC questions but haven't found one that answers my specific question yet.

We know from experience the overall rules of a 1031 exchange but our last one didn't have a HELOC and there are varying opinions on one topic, debt.

Our laat custodian told us that we had to acquire at least as much debt on the new property as we had on the relinquished property at the time of the sale. Some have argued that this is not true but we'd rather not find out the hard way and will listen to our custodian.

So here is our question. We have a rental we are thinking of selling. The mortgage is currently about $87k and we have a HELOC of $75k with currently no balance. The question is, let's say we draw $13k on the HELOC and sell the property. Would we then have to acquire at least $100k in debt on the new property or does the HELOC not count toward that and we would only have to acquire at least $87k?

Hope this makes sense and thanks in advance for responses. 

Eric 

User Stats

7,721
Posts
7,883
Votes
Dave Foster#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
7,883
Votes |
7,721
Posts
Dave Foster#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
Replied May 27 2017, 11:51

@Eric Black,  conflicting information from professionals is a tough thing to reconcile.  The old advice of "dance with who brung you" certainly feels appropriate.  But given that, if you are following the counsel of your QI on debt replacement - what are they saying about this instance? Seems to me that if you're going the debt replacement route that debt is debt.

User Stats

6
Posts
13
Votes
Joe Costello
  • Investor
  • Commack, NY
13
Votes |
6
Posts
Joe Costello
  • Investor
  • Commack, NY
Replied Nov 23 2022, 11:24

@Dave Foster So if I'm selling a rental property with an attached HELOC (which has been completely drawn for RE purposes), I can pay off the 1st mortgage and HELOC at closing, and the HELOC payoff will count against my capital gain? My goal is to pay off both positions with the gain, and then defer what is leftover to the 3rd party for the 1031. Thank you. 

User Stats

7,721
Posts
7,883
Votes
Dave Foster#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
7,883
Votes |
7,721
Posts
Dave Foster#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
Replied Nov 23 2022, 13:33

@Joe Costello, The HELOC will have to be paid off at the closing of the sale. But it will not impact your capital gain at all. The amount of gain on a sale is not determined by your debt.

Gain is the difference between your net sale and your adjusted cost basis.  And your adjusted cost basis is your purchase price plus capitalized improvements minus depreciation.  

Paying the heloc off will impact the amount of cash you have to use in your 1031 purchase.  But it doesn't impact any taxation.  

User Stats

6
Posts
13
Votes
Joe Costello
  • Investor
  • Commack, NY
13
Votes |
6
Posts
Joe Costello
  • Investor
  • Commack, NY
Replied Nov 25 2022, 12:54

Thanks for clarifying this, I really appreciate it.