Getting Credit for Property Improvements in a 1031 Exchange

Many people choose to use a 1031 exchange as a real estate transaction to avoid capital gains taxes. In its traditional sense, an individual will sell an initial piece of property and replace it with another property deferring the payment of the capital gains taxes until some point in the future. Using this exchange requires engaging with a qualified intermediary. Your qualified intermediary can provide the detailed structure and the regulation compliance needed for an improvement exchange. An improvement exchange is slightly different from a traditional 1031 exchange because in this scenario, the proceeds from a sale of the relinquished property are used to improve the replacement property. Your qualified intermediary will cause the replacement property to be officially parked with what’s known as an Exchange Accommodation Titleholder (EAT). As a result of the 180 day limit to complete all activity in your 1031 exchange, it is important to have the sale and purchase dates as close together as possible and have all of your improvement permits set to go from the beginning. Your qualified intermediary may also counsel to obtain a contract or certificate of completion and to take before and after photos to document improvements. Improvement exchanges can include built-to-suit situations as well as complete gutting of a facility. In order to ensure that you follow all of the rules associated with a 1031 exchange when you intend to use it for the purposes of improvement, you need to use a qualified intermediary who has professional experience in this area. Conduct an interview and determine whether your qualified intermediary has served in a situation like this before as well as his or her reputation and level of confidence in helping you. Identifying the right person can go a long way towards reducing your concerns about moving forward with a 1031 exchange.