1031 Improvement Exchanges

Improvement exchanges offer a unique method of acquiring a property and turning it into what you want. The improvements to an acquired property may be as simple as repairs to a building or as complex as brand-new construction. What’s more, you could get some of your existing property improved in the bargain. For smart investors, the improvement exchange is a business opportunity, unlike any other.

What is Required for an Improvement Exchange?

Since improvement exchange falls under the umbrella of 1031 deals, the improvements need to be completed within the one hundred and eighty (180) day window. Other considerations of the 1031 should also be observed.

The “like-kind” stipulation states that the exchangor would need to get back real property if they transfer real property. Thus, if improvements aren’t made, and the exchangor receives an undeveloped location, they may still be liable to pay taxes. If the revisions are subjected to a Napkin Test, the improved property’s value needs to be the same as or more than the relinquished property.

Guidelines To Accomplishing A 1031 Improvement Exchange

Phase I: Relinquishment

  • Please inform us of your intentions: Inform DeferTax that you intend to perform a delayed improvement exchange.
    • DeferTax will ensure that the improvement is in your best interest and is beneficial to you.
    • We will help you set up an account with DeferTax so we can help you with this matter, and any other 1031 exchange matters in the future.
  • Find a buyer
    • Negotiate with the buyer to finalize the price they’re willing to pay.
  • Craft a sale and purchase agreement that both the exchangor and the buyer will sign.
  • Ensure that the document contains the 1031 Exchange Cooperation Clause. This clause exists to ensure that both parties are aware that the property is subject to a 1031 exchange and agree to work with the facilitator to ensure its speedy conclusion.
  • Contact the closing agent
    • Provide the sales information to the closing agent.
    • Let the closing agent know that the sale is subject to a 1031 exchange and that the buyer has signed the 1031 Exchange Cooperation Clause, and that DeferTax is the chosen facilitator for the exchange. We will contact them shortly afterward.
  • Call DeferTax
    • DeferTax gathers the pertinent data to draft up the agreements. This data includes sales price, sale closing date, the closing agent’s information, and buyer’s information, among other things.
    • DeferTax will use the gathered information to develop the requisite documents and send them to signatories for perusal and signing.
  • Closing
    • Both parties sign forms drafted by DeferTax.
    • The title to the property is direct deeded from exchangor to buyer.
    • DeferTax will provide a federally-insured bank for the closing agent to transfer proceeds from the sale into.

 

This final step concludes the relinquishment phase of the transfer. Up to this point, you will have passed a property on to DeferTax. We will then sell it to the buyer and store the proceeds in a specific account.

Phase II: Acquisition

  • Once documents are signed at the closing, you have power as the exchanger to improve the property.
    • You may access the property to enhance the existing grounds or structure contained therein.
  • Review Invoices for Payment
    • The exchanger should submit all invoices for payment to DeferTax with their written approval and signature. DeferTax will ensure that the LLC pays the invoices based on the exchanger’s written permission.
    • When the 180-day deadline runs out, the EAT will transfer the title and all improvements to you. Alternatively, you can choose to keep the title in the LLC’s name, and DeferTax will transfer the sole ownership of the entity to you.

Differences with a Reverse Improvement Exchange

The reverse improvement exchange is almost the same as the deferred improvement exchange, with some minor differences. The acquisition process occurs before the relinquishment phase. This means that the establishment of the EAT and the transfer of title from the seller happens first. The 45-day window shifts focus from the acquisition phase to the relinquishment phase.

The exchanger must identify the properties they intend to sell by no later than 45 days after the acquisition has closed. The relinquishment phase happens as with the deferred improvement exchange. The improvement phase is unchanged, and the exchanger should know that the improvements MUST be completed before the 180-day deadline runs out.

Navigating an improvement exchange can be a challenging process for many property owners. You can count on DeferTax to help you every step of the way. Contact us today to learn more about improvement exchanges and how they can benefit you.

Contact us now, and let's get started on planning your property exchange today.