Normally raw land is non-depreciable. You cannot depreciate it, so it’s kind of like a cost of doing business. You have to put money into the dirt and you can’t recoup your outlay for the dirt until you eventually sell the dirt. What some investors are doing is they’re taking an apartment building that they’ve fully depreciated and they have maybe a $2 million gain from the sale of this apartment and they’re taking that $2 million and using it to 1031 exchange into a $2 million+ piece of dirt. In other words, they’re burying their gain in the dirt.
The nice thing about buying dirt with your 1031 exchange money is you’re burying your gain in an asset that could not have otherwise been depreciated. Then later you construct your improvements on top of the ground estate and you’d have completely fresh basis in your newly constructed improvements.
Do you Have to Build Improvements on Top of That Dirt for the 1031 Exchange to Succeed?
If the value of the dirt exceeds the net sales price of the relinquished property so you’re continuing your investment into property of equal or greater value, then no improvements are necessary for a successful 1031 exchange because you’ve already got the value. The reason you may want to do a build-to-suit exchange is when the unimproved piece of dirt isn’t of sufficient value and you want to construct improvements with your remaining exchange funds.
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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