Two Ways To Get the Build-To-Suit Property You Want From Your Next 1031 Exchange

An important fact regarding the 1031 process is that you CANNOT use the proceeds of the original sale to construct property you already own. This is a common pitfall of unwary property investors. To qualify for deferment of capital gains taxes, the replacement property has to be of like kind with the relinquished property. For this reason, the replacement property has to constitute real estate with a value at least as high, if not greater than that of the relinquished property. A renovation that is not completed is thought of as a contract for a service, which represents personal property but not real property. Due to the regulation that a replacement property must be equivalent in type and value with the property sold upon closing, it can be difficult to locate one that fulfills these requirements and also meets his or her specifications.

So, how can you get the property of your dreams out of a 1031 exchange? There are two main methods by which you can go about acquiring a property that fulfills your wants and needs as well as complying with the accounting requirements necessary for a like-kind exchange.

Your first option is to perform what is known as a 'poor man's Build-to-Suit,' in which you, as the purchaser, ask the seller to construct certain renovations on a property in order to heighten its value prior to closing on the sale. For example, if you were to relinquish a a piece of property worth one hundred thousand dollars, and were looking at a replacement property valued at ten thousand dollars, the seller of the property could construct $90,000 worth of improvements in order to raise the property value. These finished improvements would constitute real estate, and you could then buy the property for $100,000, fulfilling the requirement of equivalent value. the majority of sellers, however, will not be enthusiastic to construct the renovations you requested so that you may make a 1031 exchange. This brings us to the other available option.

In the other, likelier scenario an intermediary who is holding your funds purchases the replacement property from the seller, taking title to the property in a limited liability company, intermediary-owned company. The intermediary would then use what remains of the money to construct the necessary improvements on the property. Upon completion, the intermediary returns the replacement property to you, allowing you to complete the exchange .

Back to the previously mentioned $10,000 replacement property: the intermediary would buy the property for the asking price and would construct the required modifications using what is left of the proceeds, returning the replacement property to you when the property's value suffices to establish likeness with the relinquished property.

Although a Build-to-Suit exchange can help you acquire the replacement property that you really want, it is essential to consider the span of time required for the construction of necessary improvements. You have only one hundred and eighty to bring a exchange to completion, so it is important to be realistic regarding what work can actually be brought to completion in this period. Be mindful that an improvement represents real estate when it is completed, and so a renovation in progress doesn't add to the value of the property. Although you may not be able to construct improvements as extensive as you might want, one hundred and eighty days is ample time to accomplish considerable remodeling and renovation, and to bring your replacement property that much closer to your ideal.

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Many Types Of Investment Property Qualify For A 1031 Exchange. Consult With An Expert Who Can Facilitate A 1031 Deferred Exchange To Maximize Your Tax Savings. More Information Is Available At www.Top1031Exchange.com

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