Can 1031 funds be used for renovations?

3 Replies

We are looking to purchase a property using 1031 exchange funds. After inspections we found the property needs $27k in foundation repairs. We are negotiating price reduction with seller. The new price is below my 1031 basis. My question is can I use the remaining 1031 funds to pay for foundation repairs?

@Pete Harper, Curious how the QI for your 1031 answered this.  The three most common ways of doing that at this point would be

1. Have the seller complete the repairs and adjust the purchase price back to it covers your reinvestment target.

2. Perform a reverse exchange.  The QI takes title to the new property instead of . you.  Then once repairs are complete you take title from the QI.  Complicated and expensive enough that it's probably not worth it for $27K of repairs.

3. Instead of taking the extra cash and paying tax on it as boot you could use those proceeds to purchase another property.  And get the repair funds from another sourceThe number of properties you purchase isn't key - the aggregate value is.  

There's some other little tricks that your QI may know about that might mitigate some of that as well.

For #2 above, Dave mentions a reverse exchange.  Those are a great option for situations like this, but as Dave said, $27k might not be enough to make it worthwhile.  QIs often charge in the $5k range to take on the roles/responsibilities of Exchange Accommodation Titleholder.

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@Pete Harper Yes, you can. In case you weren't not aware, an improved or built-to-suit 1031 exchange allows investors to use a part of their 1031 proceeds for carrying out repair works in the replacement property. However, you must complete all kinds of repair before acquiring the replacement property. This way, you'll be able to complete your 1031 exchange.