Using Personal HELOC to buy a flip house

[Christine Krizenesky]

I recently used a personal HELOC to purchase a flip house then rehabbed and sold the house. I decided to use a 1031 exchange for the tax advantages and our accountant told us we can't use any of the proceeds to pay back our personal HELOC. Have any of you ever used the proceeds to pay back your personal HELOC and how did you do it?

[Dave Foster]

@Christine Krizenesky, If you are doing a 1031 exchange Then you cannot touch any cash from the sale unless you pay tax on it.  1031 proceeds can only be used to purchase replacement property.  They can also be used to pay closing costs and mortgage payoffs - but only on the property being sold.  That heloc is not on the subject property.  So if you try to pay off that heloc you've touched the money, yo'u're using 1031 proceeds for something other than the purchase of new real estate and it is taxable.

It's perfectly legitimate for you to perceive that you are simply paying back expenses.  And you are - sort of.  But when you do a 1031 exchange the IRS says that the first dollar you touch is a dollar of profit.  So what you think of as paying back expenses the IRS calls taking profit.  That's why it's taxable.

Good questions from all on can you even do a 1031.  If your intent was to hold that property for productive use and something compelling and demonstrative caused you to change your intent then the 1031 would be appropriate.  If you're intent was primarily for resale - fix n flip then the 1031 would not be appropriate.  But it is your intent and how you can demonstrate that is the determining factor.