Equity LC And 1031
I am going to use Equity line of Credit from my rental to buy another property.
What happens when I sell the 1st property and pay off the Line of Credit with the proceeds? What part do I have to use for the 1031?
If you are planning to exchange this property for another, why not just acquire the rental property you plan to purchase through an exchange rather than an equity line of credit?
Could you give a little more detail about your plan?
Dave
I have sold one, closed escrow yesterday. I am netting 40K from it and need to use it in 1031 now. There is a property I want, that costs
1 Mil, I am going for it with a partner, so I need 100K now. That is where I got stuck. The tenant in the house with equity ($65 Line of Credit and about $95 in Equity), actually offered to buy it at the end of the year. I can ask him to buy it now, but what if I still don’t have enough time between the sell and the purchase of the new one?
Am I making any sense?
OK, let me recap to see if I have it right.You just settled on the sale of the relinquished property (Property A) and the proceeds of the sale (about $40K) are being held in exchange escrow.
You have identified a replacement property (Property B) and you need to contribute about $60K cash to the purchase.
You have used an equity line of credit on another rental property (Property C) as a source of funds for the cash needed to complete the purchase of your replacement property (Property B).If I have it right so far, then:Starting with the settlement date on Property A, you must complete the acquisition of Property B within 180 days.
Property C is not participating in the exchange at this point, so your equity LOC balance is irrelevant to the exchange. If you intend to also include Property C in the exchange as a second relinquished property, then you must still work within the 180 day clock you have already started with the settlement on Property A. You can include Property C in this exchange but you must complete settlement prior to the acquisition of Property B. At settlement on Property C, your equity credit line will be paid off, and any cash left over will be added to your exchange escrow.[ Edited by DaveT on Date 03/10/2004 ]
Thank you for being patient with me on this.
1. use 40K from A 1031
use 60K from equity line don’t sell C
2. use 40K from A 1031
use 60K from equity line
later
cell C, get 95K
pay off 60K
use 35K from C 1031 or pay Capital Tax
So here is where I am confused. In that 2nd scenario, after the sale of
property C I’d only have $35K to pay Taxes on? (In case I don’t use it in 1031)
Quote:So here is where I am confused. In that 2nd scenario, after the sale of property C I’d only have $35K to pay Taxes on? (In case I don’t use it in 1031)You pay taxes on your profit. Your profit is the difference between your depreciated cost basis and your sale price.
Your profit is the same with a loan balance as it is when you own the property free and clear. The amount of your loan has nothing to do with calculating your taxable profit.
The capital gains tax on your profit is what you are deferring with a 1031 exchange. You don't tell us your purchase price and sale price for Property C, so I can't give you a number for your taxable profit if you sell Property C.[ Edited by DaveT on Date 03/10/2004 ]
Purchase Price $67K in 1992. Anticipated Sale Price $150K
I am assuming that you took about $18000 in depreciation during your holding period. I am assuming that the property includes land, and that the building on that land had an initial depreciation basis of $45K.
Here is a ballpark estimate:
Tax Liability = (18000 x 25%) + (15% x (150K - 67K)) = $8100
Thank you, Dave. It is all clear to me now.