Renovating your property before a 1031

[Debbie C.]

I have a question about the 1031 exchange that I’m still confused over. Let’s say I bought a property for $200k and rented it out for many years and paid off the mortgage so it’s free and clear. Now I want to sell it and I first spend $50k doing improvement renovations before selling. Then I find someone that’ll purchase it for $500k through a 1031 and name myself a replacement property. The costs of selling (agent fees, etc.) let’s say are about $20k. It’s my understanding that my potentially taxable gain would be $230k in this case ($500k minus $200k + 50k renovation + 20k costs to sell). However, is it true that the replacement property must also be $500k (and not $230k) or above for me to avoid capital gains taxes? And if so, does that mean if I wanted to buy a replacement property with my sales proceeds in cash (avoiding any mortgages), I’d basically have to use all of the $500k I got from the sale….meaning I wouldn’t be able to pay back the money I spent on the renovation and the other miscellaneous costs involved in the sale. Is there any way at all to do renovations on the property you want to sell in a 1031 without putting yourself in more debt?