Here’s a relatively common 1031 situation that many people have questions about. Imagine you have two mortgages on the property you’re selling - one is the primary mortgage for 250K and the other is a 90K HELOC. Let’s say you want to do a 1031 exchange on this property and the purchase price on the new replacement property is a lot higher than that of the relinquished property. Can you count the HELOC against the equity? In other words, can you wait and pay the HELOC at closing so you have less money than required in order to maximize the 1031 benefit?
Questions to Consider
These are all great questions and there is a lot to consider before making a decision, such as:
- Are both mortgages liens against the Relinquished Property?
- In order to give the buyer clear and marketable title, wont both mortgages liens need to be satisfied by the title company?
- Are these debts encumbering the Relinquished Property? If they are, then they will probably have to be full paid-off and released from the Relinquished Property.
Running Up Debt Before an Exchange
In general, it is NOT advisable to run-up the debt on the Relinquished Property in anticipation of the exchange. The IRS has challenged such transactions.
Form the IRS perspective, if you extract the equity out of the Relinquished Property just prior to disposing of it in a 1031 exchange, it is effectively the same a s taking out the boot at the time of closing.
Check out this video for additional information:
- 1031 Hotline: If you have questions about HELOC and 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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