2 Ways To Get The Build To Suit Property That You Want From Your Next 1031 Exchange

By Author: Trisha Coppley
Total Articles: 46
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A key truth about 1031 exchanges is that you CANNOT use the proceeds of the original sale to construct property you own. This is a common pitfall of inexperienced real estate investors. In order to qualify for deferment of capital gains taxes, the replacement property has to be of LIKE KIND with the property it is replacing. In this case, the property you purchase has to be real estate with a value at least as high, if not greater than that of the relinquished property. A renovation that is not finished represents a contract for a service, comprising personal property but not real estate. Due to the regulation that a property purchased as a replacement in a 1031 exchange must be equivalent in type and value with the relinquished property at the time of closing, it is, at times, difficult to find a property that fulfills these legal requirements and also meets his or her personal specifications.

So, is there a way to the property of your dreams out of a 1031 exchange? There are two main methods by which you can acquire a property that fits your wants and needs as well as complying with the accounting requirements necessary ...
... for a like-kind exchange.

The first possibility is to perform a poor man's build to suit in which you, as the purchaser, ask the seller to construct certain improvements on a property to increase its value prior to closing . To illustrate: if you relinquished a a piece of property with a value of one hundred thousand dollars, and were looking at a replacement property valued at ten thousand dollars, the seller could construct ninety thousand dollars' worth of improvements to raise the value of the real estate. The completed improvements would represent real estate. You would then be able to the property for $100,000, complying with the requirement that the two properties be of equivalent value. the majority of sellers, however, will not be enthusiastic to construct these improvements so that you can successfullyconduct a 1031 exchange. This brings us to the second option.

In the other, likelier scenario an intermediary who holds the proceeds from the sale of the relinquished property can buy the replacement property from the seller and take title to it in a limited liability company, intermediary-owned company. Then, the intermediary would use what remains of the proceeds to make the desired improvements on the property. After construction is done, the intermediary returns the replacement property to you, which then allows you to complete the exchange .

Back to the previously mentioned ten thousand dollar replacement property: the intermediary would purchase it for the asking price and would construct the desired renovations using what remains of the funds, returning the replacement property to you when the value of the property is sufficient to constitute a like kind exchange.

Though a build to suit exchange can help you acquire the replacement property that is right for you, it is important to consider the time required for the construction of desired improvements. You have only one hundred and eighty in which to complete an exchange, so you must be conscious of what can actually be finished in this period. Be mindful that a renovation is only considered to be real estate when it is completed, so a work in the process of construction doesn't add to the property's value. Though you may or may not not be able to modify your replacement property as extensively as you might want, one hundred and eighty days is sufficient time to accomplish considerable renovation, and to bring your replacement property that much closer to your ideal.