We own a waterfront lot as investment. We are building a lakefront home for rental property. We are using a home equity line of credit to fund the building of the lake home. Would the sale of the waterfront lot be eligable to pay off the home equity line of credit under the 1031 exchange rule?
No. There are several reasons this will not work but the short answer is no.
Unfortunately, no. The sale of property with a subsequent payoff of a loan is not an exchange of like kind property. The lot is a sale of real estate and the loan is not considered an acquisition of new real estate but a payoff of a loan which is personal property.
One option to consider, depending on the value of the lot. You can do a 1031 exchange into a Tenant in Common Property. This would provide a monthly income stream, which may be more than enough to cover your payments on your equity line. Part of that income is also tax deductible because you get depreciation on the TIC, and you have the appreciation potential down the road.