Can I pay off line of credit in 1031 exchange?

3 Replies

I have a property that is held in a LLC that I'd like to do improvements on. I also have an unsecured business line of credit for the LLC/business. If I use the line of credit to make improvements and then decide to sell and 1031 exchange the property into a new property can I use proceeds from the sale to pay off the line of credit without triggering a taxable event? From my research I gather that if it were a HELOC tied to the property I could pay it off but what about a business line of credited tied to the LLC?

@Steve Buchanan , You've identified the challenge correctly. Paying off a line of credit that is not attached to the selling property is first of all going to be a non-starter for many title companies. They will not do that. Which then leaves it for you to take the proceeds and pay it off yourself. But that gives you actual receipt of the funds.

There is a  chance of argument if the title company is willing to pay it off as if secured by the selling property.  But it's only a shot at demonstrating that all expenses of the heloc were in fact spent on that property.  Even then it's uncertain whether it would pass if questioned or not.  But I have seen a few accountants who have let their clients do that.  

Your best course of action in these situations is to make sure that all money used to improve the property comes from loans secured by the property so they must be paid off upon sale.

@Dave Foster thanks for this response. This is kind of what I had gathered in my research. So if I want to use a line of credit for improvements the best way to get that money back without paying taxes would be a refi. If I want to get money for improvements and sell the property soon after then maybe getting a short term hard money loan which would be tied to the property is the way to go.

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