Is there a way to utilize 1031 exchange funds for upgrades?

[Janine Badic]

I am not sure if this is in the realm of possible/ legal... but I am purchasing a property for $400k (sold the last property for $320k) via 1031 exchange.  I have $125k sitting with the intermediary.  The property I am purchasing will be turned into a short-term rentals.  Is there a way to utilize some of the $125k for furnishing(furniture and housewares) and upgrades to the property (new flooring, paint, pool)?  I only need to put 20% down and would otherwise be paying for the upgrades out of pocket when I close.  Any advice is appreciated!  Thank you kindly!

[Dave Foster]

@Janine Badic, in general you cannot exchange into improvements on property you already own in a 1031 exchange.  Your best option would be to negotiate with the seller to have the improvements completed prior to purchase and then amend the purchase price so your exchange proceeds go forward into an improved property.  You may have soe lender objection and you're dependent on the seller completing the improvements.  So that scenario could be problematic.

There are a couple of issues with the course offered by @Max T..  I like the thought but first is that any money placed into escrow to be paid later is constructive if not actual receipt and would be taxable in that situation.  Second is that you would need to be very careful of the types of improvements that they could be considered real estate and not furniture fixtures and equipment.  There is a relatively untested process similar to what Max suggests but it requires a lot of consultation and deliberation with your accounting professionals before attempting.