Actually, it is possible do structure a 1031 Exchange on the sale of one or more relinquished properties and then using the proceeds through the 1031 Exchange to construct improvements on real property you already own.

@Eric Helena, There is no statutory prohibition against purchasing from a related party to complete a 1031 exchange. 

Do a 1031 exchange and buy two replacement properties - one for $250K cash and one for $250K using the remaining $50K of proceeds as your down payment.Once this is done your 1031 is complete. 

The exchange must also be for like kind and quality.

@Kyle Carter, The strategy you're looking at would be what is called a "consolidation exchange". followed by a conversion to your primary residence. 

Then have a 6 month period to convert all old currency $20 and $100 to new currency.  

So if you do an exchange you are saving $100k in taxes today.

Most standard MLS contracts now include a box check for 1031 exchanges. 

If you have never completed a regular 1031 exchange I can not recommend a reverse 1031 exchange.

So yes you can exchange it to save capital gains taxes on $266k plus 19 years of depreciation recapture.