Investment property with HELOC & 1031 Exchange

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Investment property with HELOC & 1031 Exchange

Ben Goodall
Santee, CA · Member since 2017 · 18 posts · 15 votes

I have a HELOC on one of my investment properties. I have used a portion of it to buy another rental property and am contemplating using the rest as a down payment for a primary residence. If next year, I decide to 1031 exchange this rental property into either one or two investment properties (equal or more in value) would the amount used to pay off the HELOC be subject to capital gains tax? If so, any suggestions as to which way to accomplish this and avoid or at least minimize the tax? Thanks in advance for your help!

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
Originally posted by @Ben Goodall:

I have a HELOC on one of my investment properties. I have used a portion of it to buy another rental property and am contemplating using the rest as a down payment for a primary residence. If next year, I decide to 1031 exchange this rental property into either one or two investment properties (equal or more in value) would the amount used to pay off the HELOC be subject to capital gains tax? If so, any suggestions as to which way to accomplish this and avoid or at least minimize the tax? Thanks in advance for your help!

 Ben, 

The LOC that you have is just another loan. Getting or paying off loans have not any tax implications.The only impact is how much cash you end up after selling. If you did not have LOC, you would keep that cash instead of paying off the LOC.

For 1031 exchange, if you pay off the HELCO before the exchange, nothing changes. You pay off the loan and do the exchange.  No tax implication. 

If the buyer assumes your LOC loan, it is factored in as you received a boot. Taxability with depends on your deferred gain. This is most likely not going to happen.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Ben Goodall:

    I have a HELOC on one of my investment properties. I have used a portion of it to buy another rental property and am contemplating using the rest as a down payment for a primary residence. If next year, I decide to 1031 exchange this rental property into either one or two investment properties (equal or more in value) would the amount used to pay off the HELOC be subject to capital gains tax? If so, any suggestions as to which way to accomplish this and avoid or at least minimize the tax? Thanks in advance for your help!

     Ben, 

    The LOC that you have is just another loan. Getting or paying off loans have not any tax implications.The only impact is how much cash you end up after selling. If you did not have LOC, you would keep that cash instead of paying off the LOC.

    For 1031 exchange, if you pay off the HELCO before the exchange, nothing changes. You pay off the loan and do the exchange.  No tax implication. 

    If the buyer assumes your LOC loan, it is factored in as you received a boot. Taxability with depends on your deferred gain. This is most likely not going to happen.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    1Reply
  • Ben Goodall
    OP
    Santee, CA · Member since 2017 · 18 posts · 15 votes
    7y

    Thank you for your reply. So let's say I have an investment property that is worth 220k and I have a HELOC on it for 100k of which I have used 25k already as a down payment on another investment property. I also have a first mortgage of 100k.

    I use the remaining 75k as a down payment for a primary residence so now I have maxed the heloc out and owe 100k on it. 

    If I 1031 exchange the property with the Heloc on it, the heloc would be paid off and closed during the sale of the property and I would be rolling only the left over equity or in this case 20k into the new property. Assume the new property is also valued at 220k.

    Will I have to pay capital gains tax on the 100k, on the 25k (because 25k of the heloc was used to purchase another investment property), or no tax liability?

    Thanks.. Ben

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Ben Goodall, The gain or taxability of your sale is not based on the amount of debt.  It is the difference between your adjusted cost basis and the net sale of the property.  If you do a 1031 exchange and purchase at least as much as you sell and use all of the proceeds in the purchase of replacement investment property you will declare non-recognition of any gain including depreciation recapture on your form 8824 filed with your next return.

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  • Ben Goodall
    OP
    Santee, CA · Member since 2017 · 18 posts · 15 votes
    7y

    I guess the part I’m not getting is once you sell a place with a heloc on it, the first mortgage and the heloc are both paid off and closed. Anything over and above that I will receive as cash/check.  Now if I roll that cash/check into another property using a 1031 exchange, am I going to be taxed on the heloc which will be paid off using the proceeds?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Ben Goodall If you do a complete 1031 exchange you will not recognize a gain.  You will not generate a taxable event.

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