Investors Sell Homes Too
Imagine you have a great rental property. Its in the ideal location, great schools, everything a buyer wants in this hectic market. Except, it does need a little work, you know, being rental. How do you balance a Heloc and 1031 exchange to maximize the value of the home at the resale?
After all, some repairs first will help you net a higher return on investment.
Avoid Taxes Utilize 1031 Tax Deferred Exchange
Remember, with a 1031 Tax Deferred Exchange, you want to avoid paying tax on the profit. Scott Rodli with the Exchange Resource Group says, “It is no problem taking the HELOC [first], in order to fix up the property.”
So imagine this scenario. The Owner wants to invest $15,000 in improvements prior to going on the market. Enter the Lender with the HELOC mortgage, $15K for various improvements, then the home goes up for sale.
When the transaction closes, the exchange rules require the Seller to move all of the funds to next transaction.
Withholding the $15,000 that was used for that HELOC and 1031 then dealing with the remaining funds is actually considered cashing out.
IRS tax code would leave the Seller/Owner vulnerable to 25 to 30% in tax liability.
The Better Heloc and 1031 Route
The better route is to immediately buy equal or up with the full proceeds. Don’t pay yourselves back for the Heloc. Instead, find the perfect replacement property/s and then in a transaction separate from the HELOC and 1031, complete a refinance.
Yes, the owner will incur some closing costs. But this should be a fraction of the expense that the tax would be and closing costs are a write off.
This two step route maximizes the owners ROI and reduces tax liability. Special thanks to Doreen for inspiring this blog post.
Bob Gordon Berkshire Hathaway HomeServices
I’m Bob, Realtor, blogger. Thank you for visiting Boulder Real Estate News. Have a question about pursuing an investment of your own or selling a home? Give me a shout.
When I’m not busy helping clients like you I’m out skiing in the winters and cycling around Boulder in the summertime.