Two Ways To Get the Customized Property That You Want From a 1031 Exchange

A key truth about conducting a 1031 exchange is that you may not use the proceeds off the sale of your relinquished property to construct land you own already. This is a frequent pitfall of inexperienced real estate investors. To qualify for a capital gains tax deferral, your replacement property has to be of like kind with the property it is replacing. Thusly, the replacement property has to be real estate with a value at least as high, if not greater than that of the relinquished property. A renovation that is unfinished is considered a “contract for service,” which represents personal estate but not real property. Due to the fact that a property acquired in a 1031 exchange must be equivalent in type and value with the relinquished property upon closing, it can be hard for an investor to locate a property that fulfills these legal requirements but also meets his or her personal specifications.

So, how can you get the property of your dreams out of a 1031 exchange? There are two main methods by which you can go about acquiring a custom-built property that measures up to your wants and needs and fulfills the accounting requirements necessary for a like-kind exchange.

Your first option is to perform a poor man's build to suit in which you ask the seller to make particular improvements on a property in order to increase its value prior to closing on the sale. To illustrate: if you were to sell a property with a value of $100,000, and you were looking at a replacement property worth at ten thousand dollars, the seller could make $90,000 of improvements in order to raise the property value. The finished improvements would represent real estate. You could then buy the property for $100,000, complying with the requirement that the two properties be of equivalent value. the majority of sellers, however, will not be eager to perform the improvements you requested so that you may conduct an exchange.

In the second, more likely scenario a qualified intermediary who is holding your funds purchases the replacement property and take title to it in a limited liability company, intermediary-owned company. The intermediary would then use the remaining proceeds to make the necessary improvements on the property. Upon completion, the intermediary returns the replacement property to you, allowing you to complete the exchange .

Returning to the previously mentioned $10,000 replacement property: the intermediary would buy it for the asking price and would make the required renovations with the remainder of the proceeds, transferring the replacement property to you when the property's value is high enough to constitute a like kind exchange.

Though a Build-to-Suit exchange can go a long towards getting you the replacement property that you really want, it is essential to be attentive to the span of time required for the improvements that you would like to make on your property. You only have one hundred and eighty in which to complete a 1031 exchange, so you need to be realistic regarding what work can actually be finished in this period. Be mindful that an improvement is only considered to be real estate when it is done, and so renovation in progress doesn't add to the value of the property. Though you might not be able to modify your replacement property as extensively as you might want, one hundred and eighty days is ample time to complete considerable remodeling, and to bring your replacement property much closer to the property of your dreams.

Article Source: http://www.rightarticle.com

Professional 1031 Exchange Experts Are Available To Help Investors Maximize Tax Savings By Using A 1031 Starker Exchange. Learn More At www.Top1031Exchange.com

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated