make ready before closing with 1031 funds?

3 Replies

Closing on a 3 plex in December;  one of the units is a bit thrashed, needs probably $8k to replace carpet, vinyle, kitchen and bath.  Owner has agreed to credit me $5k at closing, but it's got to go for 1031 approved closing costs.  

Anyone got a good idea on how to do some cleanup using 1031 funds?  The 1031 company said they have a construction version of the 1031, but its a $5000 fee just for them instead of the usual $500 for a replacement property, and meant for much larger construction projects that make the $5k fee worth it. 

I've thought about hiring a contractor to do the work, raising the sales price to cover it (appraisal should be fine), having the seller pay the contractor out of closing.  Risks there: Seller bails from the contract and I'm stuck holding the bill for the contractor who sharpened up seller's property for him!!   Not enough trust there to try that, and I'd have to sue him for my costs of contractor.

Any ideas?  

@Alan Brown ,  As long as the improvements are less than 10% of the price of the house and they are for things that would normally be considered "part of the house get the vendors you want rounded up and give you firm quotes.  Instead of a concession of cash from the seller have those contract quotes placed on the settlement statement as purchase concessions from the seller.  Checks will be cut directly to those vendors for the work.  

This not an uncommon practice but is relatively untested as far as the application of the IRS deminimis rules to 1031.

By the say, I tried to accept your colleague request and somehow hit deny and now BP keeps saying we're pending.  One of these days they'll fix it.  Meanwhile good luck on that purchase :)

Wow @Dave Foster , fantastic!  That's exactly what I need.  Is this written in any 1031 lore anywhere? 

I asked my qualified intermediary for ideas, but they didn't mention this.  

So when do those checks get cut to vendors?  I wouldn't think the work would happen before closing, so is the check cut to the vendor at closing and I have to hope they will follow through?  Or would it be escrowed?  Doesn't seem like the 1031 likes things to drag on after closing, so I'm guessing I've got to trust the vendors.  

Also, does this only apply to concessions from Seller?  I ask, because I may have a few thousand more cash in my 1031 that I have to spend, which I'm sure I can find a home for in closing costs, but it would be better used for fix up... Could I use some of my1031 cash for that, or no?

Thanks a bunch!


ps I'll watch for the colleague thing.  otherwise I'll buy you a beer when i get to St Pete's

@Alan Brown Yah it's a little known little practiced hack without any real challenges in the past.  So unproved either way. The checks would have to be cut to the vendors as part of the closing so you can avoid having constructive or actual receipt of funds.  

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