Using 1031 funds for rehab?

[Tyler Cote]

Wondering if there are any set of conditions under which it’s possible to use tax deferred proceeds to rehab the newly acquired property. I hadn’t come across anyways of doing this, so assume the answer is no, but wanted to pressure test that assumption nonetheless.

To make my question more clear, let’s assume I’m selling property 1 for $400k. Will net $200k in proceeds. I’m buying a property 2 for $500k, financing with 25% down.

1a. Is there any way I could put $125k down, and then use the remaining $75k to rehab that property?

1b. If not, is there any way I could subdivide the lot (let’s assume this is kosher), then use the leftover $75k to build on the newly established plot of land?

2. If no to all of the above, is the next best course of action to take out a HELOC? I could only do this using my primary residence.

I’ve found this forum incredibly helpful since I discovered it a few weeks back — thanks in advance for any insight!!

[Sam Shueh]

1a Talk to your 1031 exchange company.

1b Yes, if you have 20% equity and decent credit. Talk to your mortgage company

2 Talk to City Planning. Dividing a parcel is very time consuming. 

[Dave Foster]

@Tyler Cote Both answers to number one are no - as long as you're trying to do this in conjunction with a 1031.  You can't exchange into improvements on property you already own.  And in both of those cases you would have purchased the property or lot and then use exchange proceeds for the improvements.  That won't fly.

A reverse exchange could accomplish exactly what you want.  But they're more expensive and financing can be tricky.   I just sent you an article on the process.

If you can access a heloc or if you can get an loc on the actual property (these are are becoming much more common) then you would be able to completely defer all taxes in the 1031 but also be able to pull funds back out to do the improvements.

[Wayne Brooks]

@Dave Foster I think you misread his question, or I did.

I believe his question is whether 1031 money can be divided between down payment money And rehab money.....on the Replacement property.  I’m pretty sure the answer is yes, but you can explain the details better.

[Dave Foster]

@Wayne Brooks Yah absolutely @Tyler Cote could use some of the money as rehab - but only if he does it as some form of a revere exchange.   The problem is that 1031 money can only be used for the purchase of real estate.

What makes a reverse exchange work is that the improvements are done before Tyler takes title to it.  It's the same as if a seller agreed to put $50K of improvements into a house he's selling for $100K in exchange for a purchase contract of $150K instead of $100K.  The QI takes title to the property and then improves it and "sells" it to the client for the cost of acquisition plus the improvements that were made.

So Tyler could work within the time limits and split off the lot and put some of the exchange proceeds into construction but only if he didnt already own the lot.  So we would have to set up a reverse, (he's doing all the work btw) take title to the house, split the lot, do the construction or improvements.  And then he purchases the house from us.

So looking at the thread again I think I would say that you cannot separate down payment and rehab money actually.  It's all down payment money (just a down payment that is buying a property already improved) if that makes sense.

Reverse's take some noodling to make sense

[Tyler Cote]

@Wayne Brooks Yes, that is what I meant. Thanks for clarifying. I’m wondering funds “tied up” in my 1031 can be used for improvements on the newly acquired property and, if so, with what restrictions.

[Wayne Brooks]

@Tyler Cote As @Dave Foster mentioned, yes.....but you’d apparently have to do a Reverse 1031 to do it. Dave does 1931’s every day as a QI.....he knows all the ins and out.