Improvements in a 1031 exchange refer to any upgrades, renovations, or additions made to a property that increase its value. In a 1031 exchange, improvements to a replacement property can be made with the proceeds from the sale of the original property, allowing an investor to defer paying capital gains taxes on the sale of the original property.
Key-Takeaway
- Improvements in a 1031 exchange refer to any upgrades, renovations, or additions made to a property that increase its value.
- Improvements can be made with the proceeds from the sale of the original property in a 1031 exchange.
Example
Suppose an investor sells a commercial property in a 1031 exchange and plans to purchase a replacement property. The investor can use the proceeds from the sale of the original property to make improvements to the replacement property, such as upgrading the electrical system, installing a new roof, or adding additional square footage.
Tips
- Work with a qualified intermediary or other professional to assist in the 1031 exchange process, including the identification of replacement property and the planning and execution of any improvements.
- Carefully evaluate the costs and benefits of making improvements, including the potential impact on the value of the replacement property.
Recommendations
- Consider the impact of any improvements on the value and income potential of the replacement property.
- Consider the impact of any improvements on the tax implications of the 1031 exchange.
- Consider alternative investment strategies if improvements may not be feasible or desirable.