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2 Methods of Getting the Custom-Built Property You Want From Your Next 1031 Exchange

An important truth in regard to conducting a 1031 exchange is that you cannot make use of the proceeds off the sale of your relinquished property to construct land you own already. This is a frequent stumbling block for unwary property investors. To qualify for tax deferment, your replacement property has to be of like kind with the relinquished property. In this case, the replacement property must be real estate with a value greater than or equal to that of the property sold. An improvement that is unfinished is considered a contract for service, comprising personal property but not real estate. Because 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 is, at times, difficult for an investor to find 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 get yourself a build-to-suit property that fulfills your wants and needs and fulfills the accounting requirements necessary for a like-kind exchange.

The first possibility is to perform a 'poor man's Build-to-Suit,' in which you ask the seller to make certain improvements on a property in order to heighten its value prior to closing . For example, if you were to relinquish a property with a value of one hundred thousand dollars, and you were looking at a replacement property worth at $10,000, the seller could construct ninety thousand dollars' worth of improvements in order to raise the property value. These finished renovations 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 very enthusiastic to perform these renovations so that you can make an exchange. This brings us to the second option.

In the other, more likely scenario an intermediary who holds your money purchases 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 remaining proceeds to build the necessary renovations on the property. After construction is completed, the intermediary returns the property to you, allowing you to complete the exchange process.

Back to the ten thousand dollar replacement property: the intermediary who was holding your money would buy the aforementioned piece of real estate for the asking price and would construct the desired renovations with what remains of the money, transferring the property to you when the value of the property is sufficient to constitute a like kind exchange.

Though a build-to-suit exchange can help you acquire the property that you really want, it is important to take into consideration the span of time required for the renovations that you would like to build on your property. You have only one hundred and eighty in which to bring your exchange to completion, so it is important to be conscious of what can actually be completed in this period. Keep in mind that a renovation represents real estate when it is finished, and so a work in the process of construction doesn't add to the value of the property. Though you may or may not not be able to modify your property as extensively as you might want, 180 days is enough time to finish considerable remodeling, and to bring your replacement property much closer to the property of your dreams.

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

Maximize Your Tax Savings By Using A Reverse 1031 Exchange When Buying Or Selling Like Kind 1031 Exchange Real Estate. Visit www.Top1031Exchange.com To Learn More.

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