1031 - Improvement Exchange (Investment Clients)

Did you know that you can use 1031 exchange funds for renovation expenses?
I was recently chatting with a client who owns an investment property and was considering a 1031 Exchange – swapping a new property that's "like-kind" for an existing one, while deferring capital gains taxes.
I shared something they were not familiar with, which was they could actually use a portion of those exchange funds for renovations on the new property. It is specifically referred to as an improvement exchange.
By doing this they could potentially:
- Defer capital gains taxes on the sale of their existing property, by reinvesting the proceeds into the replacement property and improvements, allowing their money to grow tax-deferred.
- Increase the new property’s value by using sale proceeds for improvements on the replacement property. This can also result in higher rental income or a larger profit when you eventually sell.
- Customize the replacement property to perfectly suit your investment goals.
It's important to remember that this is a complex tax strategy. There are strict time constraints, the replacement property must be "like-kind," and working with both a 1031 Qualified Intermediary (A neutral third-party middleman, facilitating the exchange process and ensuring compliance with IRS regulations) and a tax advisor is crucial for a smooth and compliant tax-deferred exchange.
If you would like to learn more about this strategy, contact us via e-mail at Team@greenesievers.com to schedule a time to meet. We can also put you in touch with a 1031 specialist who can further explain the details of this approach.
