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1031 Exchange use of funds
I have a condo in Houston, Tx that I own outright and have been renting for several years. I am looking to sell this condo and use the proceeds to purchase a multi-family property through a 1031 exchange. My question is can some of the proceeds from the sale of the condo be used to make improvements on the multi-family property if necessary?
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- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
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@Giovonni Hall, Yes you can. @Bill B.'s suggestion of having the seller complete and then pay a higher purchase price will work. And there are a couple of other ways this can be done.
1. If you want to withhold some funds from the sale you can take some cash out of the closing. It is called "boot" and is taxable. You would pay tax on that amount but shelter any remaining gain in the 1031.
2. A process called a reverse improvement exchange could be done. The QI for the 1031 takes title to the new property before you do. And while we are in title you make the improvements. And then complete your 1031 by purchasing the new property from us at the original price plus the price of the improvements. The problems with these are the lending. And the expense. They are several thousand dollars more than a regular 1031 exchange.
3. What most of our clients will do is complete their exchange putting all of their proceeds into the new property. And then immediately after completing the 1031 they will refinance and use the non-taxable refi to complete the rehab.
- Dave Foster
