What You Need To Know About Customized Properties And 1031 Exchanges

By: Ravok Corp | Posted: 14th February 2008

An essential truth in regard to conducting a 1031 exchange is that you CANNOT use the proceeds of the original sale to construct property you own. This is a frequent stumbling block of unwary investors. In order to qualify for tax deferment, your replacement property has to be of LIKE KIND with the relinquished property. In this case, the replacement property has to comprise real estate with a value greater than or equal to that of the property sold. An improvement that is not finished represents a “contract for service,” which constitutes personal estate but not real estate. Due to the regulation that a property purchased as a replacement in a 1031 exchange must be of like kind and equivalent value with the property sold at the time of closing, it can be difficult for an investor to locate a property that complies with these requirements but also fulfills his or her specifications.

So, how can you get what you really want out of a 1031 exchange? There are two main ways you can go about acquiring a build-to-suit property that measures up to your wants and needs as well as complying with the accounting requirements necessary for a like-kind exchange under section 1031

Your first choice is to perform what is known as a poor man's build to suit in which you request that the seller construct certain improvements on a piece of property in order to heighten its value prior to closing . To illustrate: if you were to sell a property worth one hundred thousand dollars, and were looking at a replacement property worth at $10,000, the seller of the property could make ninety thousand dollars' of improvements in order to raise the property value. These completed renovations would represent real estate, and you would then be able to the piece of property for $100,000, fulfilling the requirement of equivalent value. the majority of sellers, however, will not be very enthusiastic to perform these renovations so that you can conduct a 1031 exchange.

In the 2nd, likelier scenario an intermediary who holds your funds buys the replacement property from the seller and take title to it in a limited liability company, intermediary-owned company. The intermediary would then use the remainder of the proceeds to construct the desired renovations on the piece of property. After construction is finished, the intermediary transfers the property to you, allowing you to complete the exchange .

Returning to the previously mentioned ten thousand dollar replacement property: the intermediary who was holding your money would purchase the aforementioned piece of real estate at the asking price and would make the desired modifications with the remainder of the funds, transferring the property to you when the value of the property is high enough to constitute a like kind exchange.

Though a build-to-suit exchange can help you acquire the property that you really want, it is key to be attentive to the amount of time required for the construction of desired improvements. You only have one hundred and eighty in which to bring a 1031 exchange to completion, so you need to be realistic regarding what can actually be completed in this period. Keep in mind that a renovation represents real estate when it is completed, so a renovation in the process of construction doesn't add to the property's value. Though you may not be able to modify your property as extensively as you might want, 180 days is enough time to accomplish considerable remodeling and renovation, and to bring your replacement property much closer to your ideal.

Many Investment Properties Qualify For A 1031 Property Exchange. Be Sure To Consult With A 1031 Exchange Intermediary To Maximize Your Tax Savings. More Information Is Available At http://www.Top1031Exchange.com This article is free for republishing
Printed From: http://www.articlealley.com/article_474438_19.html
Back to the original article

Tags: real estate, accounting, thousand dollars, regard, hundred thousand, proceeds, improvements, investor, renovations, 1031 exchange, stumbling block, poor man, first choice