Improvement 1031 Exchanges

An added benefit of improvement exchanges is that some of relinquished property sale proceeds can also be used to improve the replacement property.  The sale proceeds from the relinquished property that are used toward the acquisition of the replacement property, as well as the proceeds that are used for improvements to the replacement property, will qualify for tax deferment provided the transaction is structured properly.

1031 improvement exchanges are more complicated than other exchanges and should only be handled by a qualified intermediary (QI). Typically, improvement exchanges are used in conjunction or combined with a delayed exchange or reverse exchange. Because improvement exchanges involve complex tax-deferred strategies, it is essential that investors work with 1031 professionals to ensure they reach their ultimate real estate goals.

All 1031 exchange requirements must be applied in an improvement exchange transaction. This includes the like-kind property requirements and the 180-day timeline set forth by the IRS. In an improvement exchange, all construction and improvements must be completed within 180 days of the sale of the relinquished property. If an investor is left with unimproved land with labor and materials to be used in the future after the 180-day deadline, the escrow holdbacks and pre-payment of labor and materials may be subject to taxation.

Documents signed at closing designate the Exchange Accommodation Titleholder (EAT) as the owner and provide the investor the ability to improve the replacement property. At the end of the 180-day time period and completion of improvements, the EAT transfers title of the replacement property to the investor. If the properties are considered to be like-kind, this successfully completes a 1031 improvement exchange and gives the investor the desired tax benefits.

Improvement exchanges are complex and require a combined strategy with another type of 1031 exchange. No matter which combined strategy is used, an improvement exchange allows an investor to acquire their replacement property and use some of the 1031 exchange funds to improve their acquired replacement property on a tax-deferred basis. In order to enjoy all the benefits of an improvement exchange, investors should seek the skilled guidance of a 1031 exchange professional.