A Build To Suit Exchange Can Be Helpful For Investors
You may have heard of the money saving capability of a 1031 tax exchange – and how it allows you to defer all of the capital gains taxes on the sale of your investment property, buy moving them into another investment property that is similar in kind. But it isn’t possible to use the money from your exchange to pay the debt on an investment property that you already own – and likewise, you can’t build improvements on land that you own with a 1031 exchange. Making improvements on land already owned is not a qualifying like-kind 1031 exchange, and can be a trap for the unacquainted taxpayer.
Ideally, you would take the money that was collected during the exchange and build to suit on the new land yourself, i.e., you secure the desired property and buy another investment property that is equal to or greater than in value. So how does one accomplish this?
There is an option that is referred to the “Poor Man’s” build to suit, in which the buyer asks the seller to make improvements to the replacement property before the close. For example, a taxpayer sells her property worth 0 thousand dollars, and wants to purchase a replacement property worth 0 thousand dollars or greater. But the raw land she desires is only worth thousand dollars, which will obviously not completely qualify for a like-kind exchange and thus, no deferred tax gain.
In this example, the buyer asks the seller of the replacement property – to raise the sales price up to one-hundred thousand dollars, then before the close, building in ninety-thousand dollars worth of improvements to the said property. After all is said and done, she’ll purchase a replacement property or the same value, which is 0,000.
It might be difficult to find a seller who is willing to increase the price of the property – in order to make improvements to it before selling it to you. One other approach to this is to have the QI (or qualified intermediary) purchase the replacement property for ,000 – then take the title into an LLC that is owned exclusively for the purpose of a 1031 exchange, and use the remaining money from the exchange to make improvements to the replacement property.
So likewise, your QI can fund the improvements during their construction, holding the property for you and paying for everything with the proceeds from the exchange. The investor can complete the exchange by receiving the replacement property from the Qualified Intermediary when the improvements are completed.
These are important things to consider when you are conducting a build to suite exchange. First of all, the one hundred and eighty day requirement allowed to complete a 1031 exchange, will not provide you with enough time for a “fancy” build to suit. And existing structure can hopefully be updated and rehabbed within this time.
Secondarily, to be considered an actual “like kind” exchange, any of the improvements to the replacement property must constitute “real-estate”, i.e., real estate for real estate. Just dumping the building supplies on the location of your property won’t be enough, to constitute “real estate” those materials must be made a permanent part of the structure or affixed into the land.
Keeping your savings in mind, be careful to stay away from any potential problems, to get the money saving tax benefits of a build to suit exchange.
