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2 Ways To Get the Custom-Built Property You Want From Your 1031 Exchange

An essential fact about the 1031 process is that you may not make use of your 1031 proceeds to make improvements on property you own. This is a frequent stumbling block of unwary property investors. In order to qualify for tax deferment, the replacement property must be of like kind with the property it replaces. For this reason, the replacement property must be real estate valued at or above the value of the property sold. An improvement that is unfinished is thought of as a “contract for service,” comprising personal property but not real estate. Due to the regulation that a property acquired in a 1031 exchange has to be of like kind and equivalent value with the relinquished property at the time of closing, it is, at times, hard to locate a property that complies with these legal requirements but also fulfills his or her specifications.

So, how can you get the property of your dreams out of a exchange? There are two main methods by which you can acquire a custom-built property that measures up to your wants and needs and fulfills the accounting requirements necessary for a like-kind exchange under section 1031

The first possibility is to conduct what is known as a poor man's build to suit in which you, as the purchaser, ask the seller to construct certain improvements on a piece of property to increase its value prior to closing . For example, if you relinquished a property worth $100,000, and were considering a replacement property valued at $10,000, the seller could make $90,000 worth of improvements to raise the property value. The completed improvements would constitute real estate. You would then be able to the piece of property for $100,000, complying with the requirement that the two properties be of equivalent value. Most sellers, however, will not be eager to construct these improvements so that you can conduct a 1031 exchange. This brings us to the second option.

In the second, more likely scenario a qualified intermediary who is holding the proceeds from the sale of the relinquished property purchases the replacement property from the seller, taking title to the property in a limited liability company, intermediary-owned company. Then, the intermediary would make use of the remaining money to build the necessary improvements on the piece of property. After construction is finished, the intermediary returns the property to you, allowing you to complete the exchange process.

Returning to the $10,000 replacement property: the intermediary who held your money would buy the aforementioned piece of real estate for the asking price and would make the required renovations with what is left of your money, transferring the property to you when the value of the property is high enough to establish likeness with the relinquished property.

Though a Build-to-Suit exchange can go a long towards getting you the property that is right for you, it is key to consider the span of time required for the improvements that you would like to make on your property. You only have one hundred and eighty in which to complete a 1031 exchange, so it is important to be conscious of what work can actually be finished in this period. Be mindful that an improvement is only considered to be real estate when it is completed, so renovation in progress doesn't increase the property's value. Though you might not be able to modify your property as extensively as you might want, 180 days is enough time to accomplish considerable remodeling, and to bring your replacement property much closer to the property of your dreams.

Article Source: http://www.articlemanual.com

1031 Qualified Intermediaries Are Specialized Tax Experts That Facilitate The 1031 Deferred Exchange Process For Investors. More Information Is Available At www.Top1031Exchange.com

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