1031 Exchange and Renovations

[Joseph M.]

If I sell an investment property can I use those funds to refinance another property to do renovations?

For example: I sell a $200,000 condo with no mortgage debt on it. Then I refinance a property that I already own to do a renovation on it. I live in this property, but at some point plan to sell it and make a profit. Would that satisfy 1031 exchange requirements?

[Dave Foster]

@Joseph M., Then 1031 exchange can only be used to purchase investment real estate.  You cannot use it for improvements on property you already own. And you cannot use it to purchase a primary residence.

You can however use it to buy an investment property and later convert that into your primary residence to get a prorated amount of the gain tax free.

You can also use it purchase and improve an investment property as long as the improvements are complete prior to you taking title to it.  This is commonly called a reverse exchange or a construction or improvement exchange.  Your QI forms a holding entity and takes title to the new property while you improve it.   Once it's complete you take title and complete your exchange.