A build to suit exchange is for growing businesses that need more (or highly customized) space in order to expand. This tax strategy allows you to sell your old property and build new replacement property to your specifications. The best part is, if done correctly, it’s all tax deferred.
Build-to-Suit Exchange Example
An example of a build-to-suit exchange is a company that has outgrown their current facility which has appreciated in value but no longer meets their current needs. A build-to-suit exchange would allow them to sell their old, appreciated property and roll the proceeds (tax free) into the newly constructed property.
Remember, to defer all of the taxes you generally have to receive a replacement property of equal or greater value. Also, materials that have been paid for but not permanently incorporated or actually constructed into the real property (within the 180 day exchange period) are not considered like-kind real estate.
Insulating yourself with an Exchange Accommodation Title-Holder
An Exchange Accommodation Title-holder (E.A.T.) is a holding company that is authorized to buy your replacement-property and hold title to it while the like-kind improvements are made. This insulates you from receiving the new replacement property prematurely.
The reason the holding company must insulate you from receiving the exchange property prematurely is that any improvements constructed on land that you already own won’t count as like-kind property. When you are conducting a build-to-suit you only have up to 180 days to complete the process. Due to this time limitation, build-to-suit exchanges are ideal for rehabbing existing structures or making modest repairs or modifications.
Identification in Build-to-Suit 1031 Exchange
Don’t forget, any improvements constructed after you take title or after the 180th day do not count as like-kind. While the benefits of a build-to-suit exchange can be tremendous this is a more complicated procedure that requires professional care.
Another important point to remember is that you need to designate or identify in writing what replacement property you will receive, including the to-be constructed real property improvements. Often people will include plans, drawings, and schematics to clearly describe what will be their replacement property.
Minnesota Built-To-Suit Exchange Services
The qualified intermediaries at Commercial Partners Exchange Company have been facilitating 1031 exchanges for decades. Contact us today at our Minneapolis office to discuss your options for deferring the tax in your build-to-suit 1031 exchange - 612.643.1031.