Paying off a line of credit at closing – what are the tax consequ

[Derek Bunyard]

Hello BP community,

What are the tax consequences of paying off a line of credit that was used to purchase another real estate property?

Here’s an example of what I’m hoping the BP community can help me answer:

Property A

Selling price = $1M

Cost Basis = $400K (purchase price + capital improvements)

Debt = $500K

• * 300K (1st) & $200k (LOC)
  • ** $200K LOC was used to purchase Property B, not for capital improvements

1. 1.  If property A is sold and the profits are used to purchase a new property – call it Property C (via a 1031 exchange), what are the taxable gains for property A?

1. 2.  If the gains are $600K, but only $500K is available for 1031 exchange to purchase Property C, would the investor be subject to capital gains tax on $100k?