2 Methods of Getting the Customized Property You Want From a 1031 Exchange by Trisha Coppley

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2 Methods of Getting the Customized Property You Want From a 1031 Exchange
by Trisha Coppley

An important truth regarding the 1031 process is that you cannot make use of your 1031 proceeds to make improvements on property you own already. This is a frequent pitfall for inexperienced investors. In order to qualify for deferment of capital gains taxes, the replacement property has to be of LIKE KIND with the relinquished property. In this case, the property you purchase must comprise real estate with a value at least as high, if not greater than that of the relinquished property. An improvement that is unfinished is considered a contract for a service, which constitutes 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 is, at times, hard for an investor to find one that complies with these requirements but also fulfills his or her specifications.

So, how can you get the property you want out of a exchange? There are two main methods by which you can acquire a build-to-suit property that fits your wants and needs as well as complying with the accounting requirements necessary for a like-kind exchange under section 1031

Your first option is to conduct a poor man's build to suit in which you, as the purchaser, ask the seller to construct particular renovations on a piece of property to increase its value prior to closing on the sale. For example, if you were to relinquish a property worth $100,000, and were considering purchasing a replacement property valued at ten thousand dollars, the seller could make $90,000 of improvements to raise the value of the piece of real estate. These completed renovations would represent 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. the majority of sellers, however, will not be enthusiastic to perform the renovations you requested so that you may conduct an exchange. This brings us to the other available option.

In the second, more likely scenario an intermediary who holds the proceeds from the sale of the relinquished property can buy the replacement property and take title to it in a limited liability company, intermediary-owned company. Then, the intermediary would make use of the remaining proceeds to build the desired renovations on the piece of property. After construction is completed, the intermediary returns the property to you, which then permits you to complete the exchange .

Returning to the $10,000 replacement property: the intermediary who was holding your money would purchase the property at the asking price and would make the desired improvements using the remainder of the funds, returning the property to you when the value of the property suffices to establish likeness with the relinquished property.

Though a build-to-suit exchange can help you acquire the property that you really want, it is essential to take into consideration the time required for the renovations that you would like to make . You only have one hundred and eighty in which to complete a 1031 exchange, so you must be conscious of what work can actually be completed in this period. Keep in mind that an improvement represents real estate when it is completed, and so a renovation in progress doesn't increase the value of the property. Though you may or may not not be able to build renovations as extensive as you might want, one hundred and eighty days is plenty of time to accomplish significant remodeling, and to bring your replacement property much closer to the property of your dreams.

Author's Biography:

Professional

Posted on: February 13,2008

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