1031 Exchange with HELOC

[Eric Black]

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 

[Dave Foster]

@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.  

[Dave Foster]

@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.

[Joe Costello]

@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. 

[Dave Foster]

@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.  

[Joe Costello]

Thanks for clarifying this, I really appreciate it.