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IMPROVEMENT EXCHANGES: "BUILD NEW OR IMPROVE
AN EXISTING PROPERTY"
LET'S EXPLORE...
The improvement exchange allows an investor, through the use of a Qualified
Intermediary, to make improvements on a replacement property using exchange
equity. In other words, an investor can maximize investment opportunities
using tax-free dollars while building or improving new investment property!
This type of exchange is also referred to as a "construction" or
"build-to-suit" exchange.
BENEFITS OF THE IMPROVEMENT EXCHANGE
Improvement exchanges offer an Exchanger a wide array of benefits which
often result in a better investment than properties readily available on the
open market. The ability to refurbish, add capital improvements, or build
from the ground up, while using tax deferred dollars, can create tremendous
investment opportunities. Due to the additional options provided by this
variation and because the 1991 Treasury Regulations established specific
parameters for improvements to be produced, improvement exchanges continue
to become more common.
Another benefit is that the new replacement property does not necessarily
have to be fully completed within the 180 day exchange period. A certificate
of occupancy is not required!
REQUIREMENTS OF AN IMPROVEMENT EXCHANGE
An Exchanger must meet three basic requirements in order to defer all of
their gain in the improvement exchange format. The Exchanger must; 1) spend
the entire exchange equity on completed improvements or down payment by the
180th day, 2) receive substantially the same property they identified by the
45th day and 3) the replacement property must be of equal or greater value
at time of transfer to the Exchanger. The final value of the replacement
property is the combination of the original purchase price plus the capital
improvements made to the property.
WHEN CAN THE IMPROVEMENT EXCHANGE BE USED?
The improvement exchange is commonly utilized to the benefit of 1031
Exchangers in the following situations:
The property to be acquired in the exchange is not of equal or greater value
to property being sold. In this case, the improvement exchange can eliminate
a taxable situation by adding capital improvements to an existing property.
To build a new investment from ground-up. This example maximizes the
investment opportunity in a given area by enabling an Exchanger to build
their own property. You don't have to be subject to property on the market
and the seller's terms. Build a new one!
The new investment is of equal or greater value but it needs refurbishments!
Utilize the improvement exchange to refurbish the new property while again
using tax-free dollars!
POTENTIAL OBSTACLES
The main obstacle in this type of 1031 exchange occurs when there is a
lender involved. This is true because throughout the improvement process,
the Intermediary is holding title to the property. This can be overcome in
most cases and a successful exchange can be completed!
Back to Table of
Contents 1031 Exchange Information
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