Equity line question on a 1031 exchanged property

[Michael Klinger]

We did a 1031 Exchange a little under a year ago. Out of an office building --  Into 3 seprate multi-family properties. We are now talking to the mortgage lender (the same lender for the three replacement properties) about securing a significant line of credit using the apartments as collateral so we can do some other short terms deals with "cash purchases" then refi, etc.

Are there any considerations or gotchas/ endangerment with this idea the regarding the original 1031 exchange? The credit line would be in the name of the parent LLC that was the entity the exchange was done in. The properties are held in their three subsidiary LLCs -- which are disregarded entities.

[Dave Foster]

@Michael Klinger, Your 1031 is complete and the 8824 reconciled and projected the basis of the old property into the new properties.  All you're talking about doing now is accessing equity by borrowing secured by that equity.  That wouldn't affect your past 1031.

the only potential "gotcha" would be in the event of a sale and future 1031.  Anything secured against the property will be paid off (it may be a partial pay off depending on negotiations with your lender) but you will still have the responsibility to not only use all of the cash in the next purchase but also to purchase at least as much as you sell.

So, if you've had to make a partial payoff to sell the property you'll either have to replace the debt or bring in cash from somewhere else to meet your 1031 requirements.