A 1031 exchange, commonly referred to as a delayed exchange, is a tax-deferred strategy used in real estate investment. It allows landowners to sell a property and then reinvest the proceeds into another “like-kind” property without recognizing capital gains taxes at the time of the exchange.  The transfer of properties between the qualified intermediary (QI) and the taxpayer constitutes an exchange, not a simple sale and purchase. The Improvement and Build-to-Suit “Construction” Exchanges are types of Safe Harbor Exchanges.

A Build-to-Suit Exchange (BTS) is where the exchanger purchases land to build the desired structure as the replacement property. Improvement exchanges is when the exchanger is purchasing replacement property with the intent to improve the structure. Once the exchanger takes title to the property, any improvements are considered payment for labor and materials and such payment is not the purchase of like kind property. Taxpayers seeking to develop or renovate property they wish to include in a 1031 exchange cannot count existing improvements on land they already own as part of the exchange. To address this, the exchanger opts for a construction exchange, allowing them to receive customized property within the exchange. These exchanges, which can be forward or reverse, involve a qualified intermediary (QI) holding proceeds from the sale of the relinquished property. Through a separate agreement with an exchange accommodation titleholder (EAT), the funds held with the QI are used to purchase the replacement property. Within 180 days of the sale, while the replacement property is held by the EAT, construction can take place. Funds for improvements can be requested through draw requests to the QI and EAT. This is one of the most common reasons a construction exchange is utilized, to maximize all exchange funds. If exchange funds are insufficient, the taxpayer may contribute additional funds or secure a loan. Other reasons include having the property meet specific criteria for the use of the property, competitive real estate markets and cost savings. In a safe-harbor transaction, the improved property is transferred to the taxpayer within the standard 180 day timeframe.

Forward, Parking/Reverse and Construction Exchanges are available through Land 1031 in a non-safe harbor manner. Contact us today to find out how! 

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