Certificates of Occupancy & 1031 Improvement Exchanges

When you’re doing a 1031 exchange and constructing improvements on the new replacement property you may be in a hurry to get as much replacement property constructed and existing as like-kind property as possible so that when you receive the replacement property it’s of equal or greater value than the property that you relinquished.

A Potential Stumbling Block

One potential stumbling block that people are concerned about is:

  • “What if I have to transfer the parked replacement property to the taxpayer before completion of all of the improvements and before a certificate of occupancy has been issued?”

From a 1031 exchange tax perspective we don’t care if a certificate of occupancy has been issued. What we care about is whether or not the like-kind real property improvements exist. What we need is to be able to deed or convey those parked property improvements to the taxpayer within the time frames of the exchange.

Certificates of Occupancy

It is of less concern from a tax perspective that we have a certificate of occupancy but sometimes it’s hard to get a deed recorded in certain jurisdictions if you don’t have the requisite certificate of occupancy. So you may be stuck with delivering an unrecorded deed to effectuate the transfer and that deed may or may not get recorded within the 180 day exchange period. But typically upon delivery of the deed you’ve got an effective convenience for tax purposes.

  • 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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