Improvements in 1031 Exchange

[Steven Prinster]

I have a property that I am doing a 1031 exchange with. However, in order to get a higher price on the market, I put about 30k into improving the property. The property is now under contract and I have the replacement property lined up and under contract aswell and contingent on my property selling. 

My question is, will that 30k I put into improving the property have to be wrapped into purchasing the replacement property or could I pull that money back out since those wouldn't be considered "capital gain"? I feel like if I profit 50k, I would be fine to just transfer that money and get back the money I put into improving the property. Also wondering how that will shake out or what I will need to do to make it happen that way if it would work how Im thinking. Thoughts?

The agent overseeing the 1031 deferred me to my accountant but I wanted to see if others on here have experience in this situation. Any thoughts and experience is appreciated.

[Roland S.]

@Steven Prinster The key rule is that you need to reinvest all the net proceeds from the sale to fully defer the tax, and any cash you take out (called "boot") becomes taxable.Your $30k improvement to boost the sale price is a capital improvement, which typically gets added to the property’s adjusted basis (what you originally paid, plus improvements, minus depreciation). Let’s say your basis was $200k, and you added $30k in improvements—your new adjusted basis is $230k. If you sell for $280k, your capital gain is $50k ($280k - $230k). For a fully tax-deferred 1031, you’d need to reinvest the full $280k net proceeds into the replacement property, regardless of the $30k you put in, because that’s what you’re receiving from the sale.

Now, to your question: Can you pull that $30k back out? Technically, no—not without triggering some tax liability. If you only reinvest $250k of the $280k proceeds (to “recover” your $30k), the $30k you keep is considered boot and would be taxable, likely as part of your capital gain. The IRS doesn’t care that you recently spent that $30k; they look at the sale proceeds as a whole. So, if you want to keep the exchange fully tax-deferred, you’d need to roll the entire $280k into the replacement property.Here’s a potential workaround: If you have other cash on hand, you could use that to cover the $30k elsewhere in your finances after closing the exchange, effectively “replacing” what you spent without touching the sale proceeds. Another option is to structure the replacement property purchase so its value exceeds the $280k (e.g., $300k), putting in an extra $20k of your own money. That keeps the full proceeds reinvested while giving you flexibility later.I’ve seen investors in similar spots assume they can pull out improvement costs, only to get hit with a tax bill because they didn’t reinvest everything. Your agent’s right to defer to an accountant—since your specific basis, depreciation, and sale details matter—but generally, the 1031 rules are strict about reinvesting all proceeds. Chat with your accountant to confirm how your $30k fits into your basis and gain calculation, and double-check with your qualified intermediary (QI) to ensure the exchange docs align with your plan. Hope that helps.