Need pro's and Con's with Selling to Buy

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Need pro's and Con's with Selling to Buy

Johnna Kay Roark
Member since 2022 · 3 posts · 1 vote

We have a rental we are looking at selling , we used a Heloc to rehab it but technically own it free and clear. We have a opportunity to possibly buy a multi unit property, so down fall Cant do a 1031 paying off Heloc. So will pay aprox. 25k in capital gains Looks like we will cash flow about 1K less to start with this new deal but long term rents can slowly be raised and its multi units.  Any input will be helpful.  

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
9mo

So go with @Kevin Sobilo ‘s plan #4.  Certainly worth doing to save $25k. 

Do the 1031, invest all cash received from the sale to avoid all taxes. Then either refinance the new purchase or just slowly pay down the Heloc with the new income. It should obviously be higher than the current property that’s being used to make the payments   Any payments, refinancing, or payoff/replacement plan that costs you less than $25k is a win.

You could reach out to your CPA or a 1031 expert like @Dave Foster and find out if there’s anyway you could get the IRS to accept your proof this Heloc was spent on the property you’re selling. But that could be a long shot.  

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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    9mo

    @Johnna Kay Roark, a few thoughts:

    1. Why do you want this new deal? Why is it appreciably better than what you have? 

    2. Why do you have to pay off the HELOC now?

    3. You could pay off the HELOC by refinancing now! Then you would have a loan on the property that could be paid off as part of a 1031.

    4. You could pay off the HELOC LATER by refinancing the new property after you have stabilized and improved it and use money you pull out to pay off or pay down the HELOC.

    1Reply
  • Johnna Kay Roark
    OP
    Member since 2022 · 3 posts · 1 vote
    9mo

    Our property now is 2 single wide mobile homes, Cons: financing them is getting strick , terms of loans are only 15 years, higher rates,versus stick built 30, this could be a factor for future sale.  Single wides depreciate, on septic .

    Pros 1 acre versus city lot, tax less than stick built , good income . 

    New multi units, city sewer, stick built , can raise rates x 4 versus times 2 . 

    Thank you for trying to help me wrap my head around this deal . 

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    9mo

    So go with @Kevin Sobilo ‘s plan #4.  Certainly worth doing to save $25k. 

    Do the 1031, invest all cash received from the sale to avoid all taxes. Then either refinance the new purchase or just slowly pay down the Heloc with the new income. It should obviously be higher than the current property that’s being used to make the payments   Any payments, refinancing, or payoff/replacement plan that costs you less than $25k is a win.

    You could reach out to your CPA or a 1031 expert like @Dave Foster and find out if there’s anyway you could get the IRS to accept your proof this Heloc was spent on the property you’re selling. But that could be a long shot.  

    2Reply
  • Johnna Kay Roark
    OP
    Member since 2022 · 3 posts · 1 vote
    9mo

    Thank you for all the help. So new purchase only wants 20% down at 5.5% amortized for 30 years with a balloon payoff in 12 years. 

    0Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    9mo
    What’s your question exactly? I’m a little confused
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9mo

    Thanks for the shout, @Bill B.! @Johnna Kay Roark in order to defer all of the tax, you must use all of the proceeds from your sale in the purchase of your replacement property. But you do have the option to do a partial exchange where you could use a portion of the proceeds to pay off the HELOC, but you would shelter the rest of the tax in your exchange.

    If there isn't much urgency to pay it off right away, you could leave in all of the proceeds and do the 1031 exchange, and once you complete your exchange, do a cash-out refi to access some tax-free cash that you could use to pay the HELOC or use the cash flow from the property, like Bill said.

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