Network, Wholesale, Flip using HELOC, now 1031 (all in 1 deal)

[Aaron Foster]

This house has been a journey; I live near DC but purchased a house in West Virginia with 42 acres from a wholesaler. I'd been friends with him on Facebook and chatted with him occasionally. He posted a cabin for $100k with mountain views. I did some research and the house (according to state records) was around 800 sq ft. Sounded like a pretty sweet getaway for my family, coworkers and military friends to unwind. 

I did google aerial views and got an idea of what it looked like, looked at 3D mapping and saw streams running through the property - come to find out they used to make moonshine back there. The wholesaler had 10-20 people interested in coming up and seeing it the following weekend so I made an offer for $110k sight unseen ($10k higher than asking). I estimated the land was worth $4-6k per acre plus $125-$150 for the house. Since I had a HELOC from another property, I used that buy this home. I figured I'd just refinance on the back end and pay the HELOC off.

When I arrived at the house it was much bigger and needed a bit more work than anticipated. We ended tearing out the fireplace, adding some structural supports and fixing a lot of other deferred maintenance since the house wasn't lived in for 10+ years. I had a friend haul my tractor up there and we cleared about 6 acres of field behind the house and re-cut some of the old logging trails for hiking and adventure sports. I got the house zoned for Tree Conservation which is the lowest property tax bracket in WV. (Even lower than farm)

I put around 30-40k into the house plus holding costs with no intention of selling. Once the house was attractive again, the market took off and I ended up listing the house (money talks). Its under contract for $325k and set to close at the end of June. After closing costs I should walk with $305k and still ow $104k on the HELOC. Since i used a HELOC to purchase the house, the debt is carried on that property (not the WV one). If i want to do a 1031, I can NOT use the proceeds from the house to pay off the HELOC, otherwise i'd be taxed at the entire gain. A few investor friends mentioned buying another property and refinancing to pay off that HELOC and get an additional HELOC on the replacement house for more access to money.

That all being said I'll need to 1031 around $300k into new project in the near future. If not, I'll park my money into a DST with lower gains but also less work. I'm also toying with opportunity zones.

[Dave Foster]

@Aaron Foster, Very nice project.  Just a couple clarifications from a stranger with the same last name :)

1.  The reason the heloc cannot be paid off when you sell and 1031 is that it is not attached to the house.  So the title company cannot pay it off on the settlement statement.

2.  The answer to that would have been to take out financing on this property now and use that to pay off the heloc.  Then when you 1031 all loans associated with that house are paid off.  And the heloc is paid off.  And you're back to scratch.

3. But if you didn't want to do that but wanted to pay off the heloc you would only pay tax on the cash you took from the 1031 to pay off the heloc.  It would be counted as profit.  But if there was still more profit than that in the property you will defer the tax on that if you do a 1031.