1031 & HELOC on Investment Multi-Family

[Eric Robert]

Thank you to all that have discussed this topic but it seems that there are differ opinions on the topic of a using funds from an investment property's HELOC as a down payment on additional investment properties. If you were to 1031 this investment property an the investment property's HELOC funds are spent, would they have to be paid back before the 1031 can be executed?

My Scenario:

Multi-Family Investment Property
Value - $500,000
Loan - $200,000
HELOC Balance - $50,000

(A) If I were to sell the investment property in a 1031 Exchange, would the $50,000 HELOC be paid off at closing, leaving a $250,000 gain that I can then put toward the new property in full?

OR

(B) Would I have to pay off the $50,000 HELOC first, sell the property, leaving me with a $300,000 gain to be used in full toward the new 1031 property?

Several post point toward using your HELOC on your existing multi-family for the down payment on another multi-family and use the 1031 to build up on your original investment property. If you cannot do this then option A would never make sense?

Thanks in advance!
Eric

[Dave Foster]

@Eric Robert, a heloc like any other recorded loan has to be paid off at closing.  It is done before title can convey.  The amount you owe does not affect your gain.  Any loan doesn't affect your reinvestment target in a 1031.  Just the amount of cash left to purchase the right amount of property.  In order to defer all tax you must purchase at least as much as you sell and use all of the proceeds from 

In your situation it would leave you with $250K of proceeds and the need to purchase at least $500K of replacement investment real estate.