Investors – Heard About a Build To Suit Exchange?
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. Nevertheless, you cannot use the money from a 1031 exchange to pay off a property that you already hold title to – or build improvements on any a piece of land that you have used in a tax exchange.Commissioning updates on land that you already hold title to doesn’t qualify as “like-kind”, and can be problematic for uneducated investors.
The 1031 exchange proceeds would ideally be used to make the build to suit to your specifications on the new land, i.e., you get the built structure you want and purchase a replacement-property that is worth the same amount (or greater value). So how does one accomplish this?
One option, called, “the Poor Man’s Build to Suit”, is to ask the seller to make improvements to the property before closing. An investor, for example, sells an investment property worth 0,000 and intends to buy a replacement property worth the same (or greater).But the replacement property is only worth about k, which isn’t enough to qualify as a “like kind” exchange, and therefore not “transferable” under 1031.
In this scenario, the investor would ask the replacement property seller to increase the sales price to 100 thousand dollars, and before closing, the seller will have to construct 90 thousand dollars worth of improvements to the property. Ultimately this investor spends the same amount (0k) to buy a property of the same value.
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.
Put another way, your qualified intermediary will hold the property during it’s improvement process, funding them with the money from the exchange. The investor will receive the property from the QI when the improvements are completed on the replacement property, thereby completing the exchange.
Keep the following points to in mind about the 1031 Build to Suit exchange. 1st, the 180 day period that is allotted to you to complete your exchange, won’t give you adequate time for a complex build to suit. But, this should be enough time to rehab and update an already standing building.
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.