Using 1031 funds for rehab?

[Tyler Cote]

Wondering if there are any set of conditions under which it’s possible to use tax deferred proceeds to rehab the newly acquired property. I hadn’t come across anyways of doing this, so assume the answer is no, but wanted to pressure test that assumption nonetheless.

To make my question more clear, let’s assume I’m selling property 1 for $400k. Will net $200k in proceeds. I’m buying a property 2 for $500k, financing with 25% down.

1a. Is there any way I could put $125k down, and then use the remaining $75k to rehab that property?

1b. If not, is there any way I could subdivide the lot (let’s assume this is kosher), then use the leftover $75k to build on the newly established plot of land?

2. If no to all of the above, is the next best course of action to take out a HELOC? I could only do this using my primary residence.

I’ve found this forum incredibly helpful since I discovered it a few weeks back — thanks in advance for any insight!!

[Dave Foster]

@Tyler Cote Both answers to number one are no - as long as you're trying to do this in conjunction with a 1031.  You can't exchange into improvements on property you already own.  And in both of those cases you would have purchased the property or lot and then use exchange proceeds for the improvements.  That won't fly.

A reverse exchange could accomplish exactly what you want.  But they're more expensive and financing can be tricky.   I just sent you an article on the process.

If you can access a heloc or if you can get an loc on the actual property (these are are becoming much more common) then you would be able to completely defer all taxes in the 1031 but also be able to pull funds back out to do the improvements.