Can I draw from an existing HELOC before I sell? And a separate question about a lien

[Benjamin D.]

Hi, 

I have a lease ending on a rental property, and it's time to sell and buy in another location.

The property has a mortgage, a HELOC, and also a 3rd lien where remaining equity was used as collateral for an unrelated loan.

The 3rd lien will need to either attach to the new rental or get moved to my primary residence as substitute collateral.

First question: the HELOC. In order to move the lien to my primary residence, I would need to reduce the equity in the property I'm selling and/or increase the equity in my home (which also has a HELOC). The rental HELOC originated years ago. The only way to do this would be to draw from the rental HELOC and use that to pay down the primary residence HELOC. For the purposes of doing a 1031, is it sufficient that the rental HELOC was in existence already? Or would anything I draw from it now be considered boot?

Second question: 1031 and the lien. The 3rd lien-holder is ok to move the lien and collateral to a new rental property, but only if

1) Proceeds will be held in an interest-bearing account pledge as collateral to the loan and/or
2) Proceeds can be used to pay principal down on your loan.
3) Proceeds can be used to purchase another property similar in nature that is the same or greater than the amount of equity in the existing property— (new property will replace existing as collateral on your loan).

I'm asking them for clarification for case 3 to see if it would be acceptable for the QI to hold those proceeds. But if I were the bank I would assume not. If the bank wants to hold the funds in the interim, I assume that means there's no way to 1031. Is there any way around this?

If they are ok with the QI holding the funds but need me to promise the funds to them if I don't buy something new (or some sort of similar promise), would that count as me having that money and prohibit a 1031?

This is my first time through this and I'm just getting started, so I don't have any advisors yet and I'm just trying to make sure this can all work before I start the ball rolling.

Thanks!

[Benjamin D.]

Hi @davefoster1031, thanks for the info/thoughts!

To clarify, the 3rd lien is not technically owed any of this money or proceeds unless I default on my unrelated business loan. They weren't offering to act as a QI or facilitate the exchange, those were their conditions for allowing me to move the lien/collateral to another property (which they have no obligation to do). I think the "interest bearing" bit just meant that they would hold the cash in my name while it's between sales, not that they'd be doing anything with it. They just don't want to let it out of their control after they've released the lien until they have a lien on another property. 

On #3, I would think so, but they so far have pushed back on that, as they technically wouldn't have a legal right to that money until the second closing. I do wonder if they'd be satisfied with a side contract promising to pay them back if the 1031 sale does not go through for some reason, or if their collateral does not get replaced within 180 days, or whatever. I didn't get the sense they would go for it. I'm also curious if that obligation would run afoul of the 1031 rules.

On #4, there's nothing that needs to be paid back to the 3rd lien, they just want to have at least as much collateral on the new property as they do on the relinquished property. 

I'm not looking to cash anything out (either before or after the sale), I really just want to swap properties and am just trying to figure out the best way to handle it with this pesky extra lien.

One question for you: for answering your #1, which professional (with 1031 experience) is most qualified to answer that or help me decide how to structure the movement of funds: a QI, a lawyer, an accountant, or someone else?

Thanks!