1031 and heloc question


I have a question that I have been thinking about for a couple days and instead of calling my cpa and getting charged I thought I’d come here first.
Say I have 600k in equity in a personal residence and I take out a 300k heloc/2nd mrtg. So I have 300k in cash and then deciede to sell the property and exchange to another personal residence. Will I be charged a gain on the money I took out before the exchange or is it valid with the remaining 300k left in equity.
Also let’s say that the new property has even more equity am I able to take out another heloc without tax ramifications from the exchange.
I hope this made sense. I guess a simple way to put it is, can I take money out either before or after a 1031 exchange


Your personal residence is not eligible to participate in a 1031 exchange in the first place, so your question is moot. For your primary residence you would use Section 121 to exclude up to $250K in profit per taxpayer from capital gains.

Note that equity is not the same as profit. For most homeowners, equity will be greater than profit. Subtract how much you paid for the house from the sale price and you have a rough iudea of your profit. If you are married filing jointly and meet the two year occupancy and ownership requirements, then you and your spouse can combine your capital gains exclusions to take up to $500K in tax free profit from the sale of your primary residence. Any profit that exceeds the exclusion amount is still a taxable capital gain.

Thank you for the reply Dave.
I didn’t know is that you could not 1031 a personal residence so thank you for that info. It obviously answers my question becuase, its now not a valid question at all :biggrin

The question is why would you want to only DEFER capital gains with a 1031 when you can EXCLUDE them completely under the capital gains exclusion rules under Section 121.

Tax free profit now is much better than just deferring the taxes to a later date.

I have read a few posts from primary residence homeowners who bought a rehab project, to work on while they were living in it. After two years of ownership and occupancy, they would sell the house for a tax free profit and repeat the process with another owner-occupied rehab project. Our current tax rules let you do this once in a 24 month period, but you can repeat every 24 months and a day.