Development

Category: Build to suit Improvement Exchange

  • Case Study: A Property Improvement Exchange of Real Estate

    The Facts
    On August 1, 2014, we received a call from the exchange department of a national banking association.  She had a client for whom she was facilitating a conventional exchange of real estate.  The exchange account had been opened on July 21, 2014, and the net proceeds from the sale of the relinquished property located in Bellmore, New York were $1,075,000.  The client intended to acquire a replacement property in Massapequa, New York for $640,000.  If nothing further was done the client would be trading substantially down in value and would be realizing little or no tax deferral from the exchange.  Since the replacement property required significant improvements, we suggested to the client that a build-to-suit, or improvement exchange, may be advantageous, as it would potentially allow her client to defer some, if not all, of the gain that would otherwise be recognized.  
    The Problem
    Under IRS rules, once a taxpayer takes legal ownership of the replacement property any additional expenditures used to make improvements to the property do not count towards its value in the exchange.  Real estate exchanges have to involve disposing of and acquiring “like-kind” real estate.  When a taxpayer sells relinquished real estate and acquires replacement real estate, any improvements made thereafter are considered payment for labor and materials.  Labor and materials are not like-kind to the sale of real estate. Unable to include the cost of improvements to the replacement property, many taxpayers are unable to make exchanges for property of equal or greater value.
    The Solution
    The IRS issued Revenue Procedure 2000-37 in part to accommodate the need for inclusion of improvement costs in the value of replacement property. Under the Revenue Procedure, an independent third party may take title to the replacement property in the taxpayer’s stead and make the desired improvements on the taxpayer’s behalf.  Build-to-suit exchanges refer to exchanges in which improvements are made on a vacant parcel of property, whereas property improvement exchanges refer to exchanges in which improvements are made to an existing structure on a parcel of real estate.  The procedures for facilitating a build-to-suit and property improvement exchanges are identical.
    When the exchange company services a routine exchange, it acts as a qualified intermediary or QI.  When an exchange company services a property improvement, or build-to-suit exchange, it is acting as an exchange accommodation titleholder or EAT. The EAT takes title to the new property and parks, or holds, that title until the earliest of the following:

    180 days from when the relinquished property is sold
    The improvements are completed
    180 days from when the replacement property was parked by the EAT

    The client entered into a property improvement exchange with an EAT and directed the QI to send funds periodically to the EAT, which were used to purchase the Massapequa property and to improve it according to the client’s instructions.  Before any payments were made to any party, written confirmation by the client was obtained to make sure he was satisfied regarding the particular piece of work.  When the balances held by the EAT declined, instructions were given to the QI to send more funds to the EAT. 
    Over the course of the transaction more than ten persons and companies were paid by the EAT for services related to the improvements.  By the time 180 days had elapsed from the sale of the relinquished property, most of the improvements were completed. The client had $39,000 left in the forward exchange account and only that sum was subject to capital gains taxes.  This allowed this taxpayer to defer taxes on the $396,000 used for the improvements.
    The Result
    The client’s old property had a zero basis.  Had the client only purchased the replacement property for $640,000, he would have faced taxes on the remaining amount of $435,000. At an approximate rate of 40%, this would have cost him $174,000.  By completing a property improvement exchange, he was able to improve the replacement property while deferring most of the tax that would otherwise be payable.
     
    Updated 5/17/2022.

  • Case Study: A Property Improvement Exchange of Real Estate

    The Facts
    On August 1, 2014, we received a call from the exchange department of a national banking association.  She had a client for whom she was facilitating a conventional exchange of real estate.  The exchange account had been opened on July 21, 2014, and the net proceeds from the sale of the relinquished property located in Bellmore, New York were $1,075,000.  The client intended to acquire a replacement property in Massapequa, New York for $640,000.  If nothing further was done the client would be trading substantially down in value and would be realizing little or no tax deferral from the exchange.  Since the replacement property required significant improvements, we suggested to the client that a build-to-suit, or improvement exchange, may be advantageous, as it would potentially allow her client to defer some, if not all, of the gain that would otherwise be recognized.  
    The Problem
    Under IRS rules, once a taxpayer takes legal ownership of the replacement property any additional expenditures used to make improvements to the property do not count towards its value in the exchange.  Real estate exchanges have to involve disposing of and acquiring “like-kind” real estate.  When a taxpayer sells relinquished real estate and acquires replacement real estate, any improvements made thereafter are considered payment for labor and materials.  Labor and materials are not like-kind to the sale of real estate. Unable to include the cost of improvements to the replacement property, many taxpayers are unable to make exchanges for property of equal or greater value.
    The Solution
    The IRS issued Revenue Procedure 2000-37 in part to accommodate the need for inclusion of improvement costs in the value of replacement property. Under the Revenue Procedure, an independent third party may take title to the replacement property in the taxpayer’s stead and make the desired improvements on the taxpayer’s behalf.  Build-to-suit exchanges refer to exchanges in which improvements are made on a vacant parcel of property, whereas property improvement exchanges refer to exchanges in which improvements are made to an existing structure on a parcel of real estate.  The procedures for facilitating a build-to-suit and property improvement exchanges are identical.
    When the exchange company services a routine exchange, it acts as a qualified intermediary or QI.  When an exchange company services a property improvement, or build-to-suit exchange, it is acting as an exchange accommodation titleholder or EAT. The EAT takes title to the new property and parks, or holds, that title until the earliest of the following:

    180 days from when the relinquished property is sold
    The improvements are completed
    180 days from when the replacement property was parked by the EAT

    The client entered into a property improvement exchange with an EAT and directed the QI to send funds periodically to the EAT, which were used to purchase the Massapequa property and to improve it according to the client’s instructions.  Before any payments were made to any party, written confirmation by the client was obtained to make sure he was satisfied regarding the particular piece of work.  When the balances held by the EAT declined, instructions were given to the QI to send more funds to the EAT. 
    Over the course of the transaction more than ten persons and companies were paid by the EAT for services related to the improvements.  By the time 180 days had elapsed from the sale of the relinquished property, most of the improvements were completed. The client had $39,000 left in the forward exchange account and only that sum was subject to capital gains taxes.  This allowed this taxpayer to defer taxes on the $396,000 used for the improvements.
    The Result
    The client’s old property had a zero basis.  Had the client only purchased the replacement property for $640,000, he would have faced taxes on the remaining amount of $435,000. At an approximate rate of 40%, this would have cost him $174,000.  By completing a property improvement exchange, he was able to improve the replacement property while deferring most of the tax that would otherwise be payable.
     
    Updated 5/17/2022.

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com

  • Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

    In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges. 
    Reverse 1031 Exchanges
    Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
    In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
    As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an info@accruit.com