Can I do a 1031 exchange on a property that has a HELOC?

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Can I do a 1031 exchange on a property that has a HELOC?

Rhett Z Begley
Virginia Beach, VA · Member since 2018 · 46 posts · 23 votes
BP, I have a property bought using a 1031 and I’m looking to do another 1031 to upgrade to a small multi-family. I currently have a zero-balance HELOC on it. If I use the HELOC (say, 20k of a 30k HELOC), can I still sell the property and do a 1031 or do I have to pay off the HELOC first? Thanks! Best, Rhett
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
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Originally posted by @Rhett Z Begley:

@Natalie Kolodij thanks for the reply. I was under the impression that under the new tax laws HELOC interest was only deductible if the HELOC was against your primary residence. Is there more to it than that?

@Dave Foster thank you for the detailed response, I just want to make sure I correctly understood what you explained. Just to use easy numbers, say the house is worth 200k, I have 100k equity, and a 50k HELOC. I'm planning to list the house for sale (to do another 1031X) toward the end of the year, maybe November. I'd like to use 30k of the HELOC in the next 30 days for either a downpayment on another property or toward a rehab. So if I spend 30k, then I sell the house for 200k it would pay off the primary note for 100k, then the HELOC for 30k, and leave me with 70k to put down on the next property? And that next property just needs to have a purchase price of more than 200k?

You're kind of backwards on that. 

HELOC destructibility is now determined by what the funds were used for.

IF you pull a HELOC on your primary and use it to buy jet skis and a vacation it's not deductible.

If you pull a HELOC on your primary and use it to buy a rental, deductible as mortgage interest on that rental.

If you pull a HELOC ona rental and use it to renovate that rental, deductible as improvement/acquisition debt on that rental.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    @Dave Foster ?

    1Reply
  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    8y

    @Rhett Z Begley Sure you just need to match the debt on the new property you purchase.  

    Also- What will you be using the HELOC for? Heloc interest used for personal purposes (not business, real estate related) is no longer deductible as of 2018. Just something to keep in mind.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Rhett Z Begley, Doing a 1031 with a heloc on it is perfectly fine.  The heloc is simply a second mortgage that gets paid off in the sale and affects how much cash you have for reinvestment.  You don't have to replace it.  The two requirements are that you purchase at least as much as you sell and that you use all of the net proceeds in your purchase.  So if paying a heloc off on your sale reduces the net proceeds that simply means that you'll either have to take out more debt or add cash of your own to meet the purchase requirement.

    Whats more of a concern would be how and when you access the heloc.  Taking cash from it right before closing and the start of a 1031 exchange can be perceived by the IRS as a way to take untaxed profit from the 1031.  The greater the length of time between accessing the heloc and sale the better.  And make sure your accessing the heloc for business not personal purposes consistent with your current business model. 

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  • Rhett Z Begley
    OP
    Virginia Beach, VA · Member since 2018 · 46 posts · 23 votes
    8y

    @Natalie Kolodij thanks for the reply. I was under the impression that under the new tax laws HELOC interest was only deductible if the HELOC was against your primary residence. Is there more to it than that?

    @Dave Foster thank you for the detailed response, I just want to make sure I correctly understood what you explained. Just to use easy numbers, say the house is worth 200k, I have 100k equity, and a 50k HELOC. I'm planning to list the house for sale (to do another 1031X) toward the end of the year, maybe November. I'd like to use 30k of the HELOC in the next 30 days for either a downpayment on another property or toward a rehab. So if I spend 30k, then I sell the house for 200k it would pay off the primary note for 100k, then the HELOC for 30k, and leave me with 70k to put down on the next property? And that next property just needs to have a purchase price of more than 200k?

    1Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    8y
    Originally posted by @Rhett Z Begley:

    @Natalie Kolodij thanks for the reply. I was under the impression that under the new tax laws HELOC interest was only deductible if the HELOC was against your primary residence. Is there more to it than that?

    @Dave Foster thank you for the detailed response, I just want to make sure I correctly understood what you explained. Just to use easy numbers, say the house is worth 200k, I have 100k equity, and a 50k HELOC. I'm planning to list the house for sale (to do another 1031X) toward the end of the year, maybe November. I'd like to use 30k of the HELOC in the next 30 days for either a downpayment on another property or toward a rehab. So if I spend 30k, then I sell the house for 200k it would pay off the primary note for 100k, then the HELOC for 30k, and leave me with 70k to put down on the next property? And that next property just needs to have a purchase price of more than 200k?

    You're kind of backwards on that. 

    HELOC destructibility is now determined by what the funds were used for.

    IF you pull a HELOC on your primary and use it to buy jet skis and a vacation it's not deductible.

    If you pull a HELOC on your primary and use it to buy a rental, deductible as mortgage interest on that rental.

    If you pull a HELOC ona rental and use it to renovate that rental, deductible as improvement/acquisition debt on that rental.

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    2Reply
  • Rhett Z Begley
    OP
    Virginia Beach, VA · Member since 2018 · 46 posts · 23 votes
    8y

    @Natalie Kolodij thanks for the clarification! That’s much better news!

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Rhett Z Begley, you got it !!

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