Investment property with HELOC & 1031 Exchange

[Ben Goodall]

I have a HELOC on one of my investment properties. I have used a portion of it to buy another rental property and am contemplating using the rest as a down payment for a primary residence. If next year, I decide to 1031 exchange this rental property into either one or two investment properties (equal or more in value) would the amount used to pay off the HELOC be subject to capital gains tax? If so, any suggestions as to which way to accomplish this and avoid or at least minimize the tax? Thanks in advance for your help!

[Ashish Acharya]

Originally posted by @Ben Goodall:

I have a HELOC on one of my investment properties. I have used a portion of it to buy another rental property and am contemplating using the rest as a down payment for a primary residence. If next year, I decide to 1031 exchange this rental property into either one or two investment properties (equal or more in value) would the amount used to pay off the HELOC be subject to capital gains tax? If so, any suggestions as to which way to accomplish this and avoid or at least minimize the tax? Thanks in advance for your help!

 Ben, 

The LOC that you have is just another loan. Getting or paying off loans have not any tax implications.The only impact is how much cash you end up after selling. If you did not have LOC, you would keep that cash instead of paying off the LOC.

For 1031 exchange, if you pay off the HELCO before the exchange, nothing changes. You pay off the loan and do the exchange.  No tax implication. 

If the buyer assumes your LOC loan, it is factored in as you received a boot. Taxability with depends on your deferred gain. This is most likely not going to happen.