Build to Suit or Improvement 1031 Exchange
Posted by Andy Gustafson on Wed, May 19, 2010
A build to suit or improvement 1031 exchange uses exchange proceeds to improve the replacement property. A typical build to suit is when real property is sold and replaced with land and improvements. The key is timing, given only those improvements fixed to the ground by the 180th calendar day post closing represent the value of capital gains deferred. Prepare to begin construction the day following the purchase of the replacement property to maximize percentage complete.
For example, a rental property is sold for $100. Land is purchased for $20 and $80 or more will be spent on improvements. Once either the rental property is sold or the land is purchased, whichever occurs first, starts the 180 calendar day clock that all if not the majority of improvements must be completed. If by the 180th day, improvements of only $60 are completed, a tax on the remaining $20 will be triggered. The $60 represents installed improvements, not invoiced or delivered to be installed.
Exchange Accommodator Titleholder
The exchange mechanics require an Exchange Accommodator Titleholder (EAT) to take title to replacement property. This means the land is purchased on behalf of the EAT. The EAT enters into a construction management agreement with the Exchangor who is the construction manager overseeing the build out. The Exchangor approves all contractor payments and the EAT pays the vendors weekly from the exchange proceeds. Towards the 180th day the land and improvements are transferred to the Exchangor by either transferring ownership of the EAT, a single member limited liability company or title.
That's a short story of how a build to suit or improvement 1031 exchange works.
Do you want to sell a motel, purchase and make improvements to the new motel? Selling a commercial building and want to acquire and improve the new building? These are both examples of 1031 improvement exchanges.
