1031 exchange question

[Patrick Flanagan]

I’m in the equity zone on my 4 plex to do a 1031 exchange and use that equity to buy a smaller apartment building. 

I have a basic understanding of how the process works. My question is do I need to use all of the equity towards the down payment of the property, to avoid capital gains tax? 

Or could you set some of the money aside to do some renovations to the property?

thanks,

Pat

[Dave Foster]

thanks for that shout out @David M., @Patrick Flanagan, If you want to defer all tax you must do 2 things.  First you must purchase at least as much as your net sale (the contract price minus closing costs).  And second, you must use all of your net proceeds (the equity zone) in your purchase.  

There are 3 ways to use money for improvements

1. a reverse improvement exchange where we as the QI take title to the new property and hold it for up to 180 days while you improve the property. (expensive and complicated).

2. Complete your full exchange and immediately after do a cash-out refinance on the property And use that money (not taxable) to improve the property.

3. Use your own proceeds from anywhere to improve the property and then after it is improved do a cash-out refinance on the newly improved property to pay yourself back plus whatever you want.