This Tuesday’s Tip is for everyone who asks if you can use exchange proceeds to make improvements to your replacement property.
Topics: 1031 improvement exchange
An improvement exchange allows you to use some of the 1031 exchange proceeds to make improvements to the replacement property. This type of exchange is usually structured when the purchase price of the replacement property is less than the net selling price of the relinquished property. It’s not as simple as you buying the replacement property and then making the improvements because the improvements would not qualify as like-kind property. The value of the property at the time you acquire it is all that can be counted. You cannot take title to the replacement property until the improvements are completed. Typically, the Qualified Intermediary (QI) (or an affiliate of the QI) will take title, sign the contract with the builder and have the improvements completed. Once the improvements are completed, the QI conveys title of the improved property to you.