Your mantra when conducting a 1031 exchange should be to acquire replacement property of equal or greater value and equal or greater equity. A build-to-suit exchange is a way to fix the problem of your replacement property being of lesser value than your relinquished property, as it allows you to construct improvements to add value. The downside is you only have 180 days in a forward exchange to construct those improvements. You can’t build the Taj Mahal in that time period.
A build-to-suit exchange works well when the improvements aren’t extraordinarily difficult. Some examples of improvements that are typically quick and easy to accomplish within your 180 day timeline:
Replacing the roof on the property
Repaving the parking lot
If you want to do extensive improvements to your property, you can look into a reverse construction exchange. Let’s say that you have a $70 million apartment complex that was built in 1965. This complex has insufficient parking, no in-unit laundry, and the forecast for appreciation is not good. As a result, you decide you want to sell this property, but you’re wary of the taxes that will come with such a sale. On top of that, you can’t find any existing replacement property that meets your needs.
What you might do is construct a massive replacement property yourself in a non-safe-harbor reverse exchange. The safe harbor limits your holding period to 180 days. In a non-safe-harbor exchange, the holding period is indefinite. You could have the qualified intermediary act as your surrogate and buy the land you want and construct the improvements to your specifications. When you’re getting close to completion of construction, you list your 1965 apartment complex for sale so that you come into cash on your 1031 exchange at roughly the same time that the certificate of occupancy is being issued on your new replacement property. On form 8824, it looks like you did a forward exchange – it’s just that the replacement property was purchased and held initially by a qualified intermediary under a non-safe-harbor exchange.
Twin Cities 1031 Exchange Services
If you want to learn more about how a 1031 exchange can save you money in capital gains taxes, contact the team at CPEC1031, LLC. For more than twenty years, we have been helping taxpayers with their like-kind exchanges under section 1031 of the Internal Revenue Code. We can help guide you through the process, regardless of where your property is located or how big or small it is. Reach out to us today at our Twin Cities office (located in downtown Minneapolis) to learn more about our services and see how we can help.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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