Improvement Exchange

An improvement 1031 exchange, also known as a construction or build-to-suit exchange, is a type of 1031 exchange where the replacement property acquired through the exchange undergoes significant improvements or construction after the exchange. In this scenario, the taxpayer utilizes a qualified intermediary (QI) to facilitate the exchange while the improvements are made to the property.

Here’s how an improvement 1031 exchange typically works:

1. Relinquished Property Sale: The taxpayer sells their relinquished property and enters into a standard 1031 exchange agreement with a qualified intermediary. The sale proceeds are held by the QI.

2. Identification Period: Within 45 calendar days of the relinquished property sale, the taxpayer identifies potential replacement properties in writing, following the identification rules for a 1031 exchange.

3. Exchange Period: The taxpayer has a total of 180 calendar days from the sale of the relinquished property to complete the acquisition of the replacement property, including any improvements or construction.

4. Acquisition of Replacement Property: The taxpayer acquires the replacement property and begins the process of improving or constructing it. The improvements can include renovations, additions, or other construction activities to enhance the property’s value or functionality.

5. Completion of Improvements: The improvements or construction on the replacement property must be substantially completed by the end of the 180-day exchange period. The IRS does not provide a specific percentage or definition for “substantial completion,” but it generally refers to a significant portion of the work being finished.

It’s important to note that the taxpayer must adhere to all other rules and requirements of a 1031 exchange. Additionally, 1031 QualEx recommends consulting with your tax professional ahead of time to¬† ensure the improvements envisioned meet with all requirements.

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