1031 exchange, pull out downpayment without penalty?

[Fred Smith]

Hi all,

I have a property that I bought using a HELOC from my primary residence as the downpayment 1.5 years ago. I'm considering selling the property in order to flip the equity from it into another rental property and ideally, avoid cap gains tax through a 1031. I was doing the math based on the idea of selling for ~350K, pay back the HELOC for down payment (50k), pay off the mortgage(195k), pay realtors (20k) and the remaining (~80k) would go to the next property in order to work as a 1031. But would paying back the HELOC be allowed under 1031 exchange? Or does that money need to go to the next property too? Just trying to make sure my math is in the right ballpark. Thanks.

[Dave Foster]

@Fred Smith unfortunately paying that heloc off could cause a boot recognition.  If it were attached to the property you're selling no problem.  But to take cash from the sale and pay off the heloc wouldn't fly.

What you could do is to complete the 1031 exchange and then do a cash out refi after the fact and get the money to pay off your heloc at that time.

The IRS says that any time you take cash out you are taking profit.  You may think it's your original deposit but they say it's profit.  And since they have nuclear weapons they win.