Can I do a 1031 exchange on a property that has a HELOC?

[Rhett Z Begley]

BP, I have a property bought using a 1031 and I’m looking to do another 1031 to upgrade to a small multi-family. I currently have a zero-balance HELOC on it. If I use the HELOC (say, 20k of a 30k HELOC), can I still sell the property and do a 1031 or do I have to pay off the HELOC first? Thanks! Best, Rhett

[Natalie Kolodij]

Originally posted by @Rhett Z Begley:

@Natalie Kolodij thanks for the reply. I was under the impression that under the new tax laws HELOC interest was only deductible if the HELOC was against your primary residence. Is there more to it than that?

@Dave Foster thank you for the detailed response, I just want to make sure I correctly understood what you explained. Just to use easy numbers, say the house is worth 200k, I have 100k equity, and a 50k HELOC. I'm planning to list the house for sale (to do another 1031X) toward the end of the year, maybe November. I'd like to use 30k of the HELOC in the next 30 days for either a downpayment on another property or toward a rehab. So if I spend 30k, then I sell the house for 200k it would pay off the primary note for 100k, then the HELOC for 30k, and leave me with 70k to put down on the next property? And that next property just needs to have a purchase price of more than 200k?

You're kind of backwards on that. 

HELOC destructibility is now determined by what the funds were used for.

IF you pull a HELOC on your primary and use it to buy jet skis and a vacation it's not deductible.

If you pull a HELOC on your primary and use it to buy a rental, deductible as mortgage interest on that rental.

If you pull a HELOC ona rental and use it to renovate that rental, deductible as improvement/acquisition debt on that rental.