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A key truth regarding 1031 exchanges is that you cannot use the proceeds of the original sale to fund improvements on land you already own. This is a common pitfall of unwary property owners. To qualify for tax deferment, your replacement property must be of LIKE KIND with the relinquished property. In this case, the property you acquire as a result of the 1031 exchange has to be real estate with a value greater than or equal to that of the property sold. A renovation that is incomplete constitutes a “contract for service,” which represents personal property but not real property. Because a property purchased as a replacement in a 1031 exchange has to be of like kind and equivalent value with the property sold at the time of closing, it is, at times, difficult to locate a property that fulfills these legal requirements and also fulfills his or her personal specifications.

So, is there a way to the property of your dreams out of a exchange? There are two main ways you can get yourself a custom-built property that fulfills your structural specifications as well as complying with the accounting requirements necessary for a like-kind exchange.

Your first option is to conduct a 'poor man's Build-to-Suit,' in which you, as the purchaser, ask the seller to make certain renovations on a property to increase its value prior to closing on the sale. For example, if you relinquished a a piece of property worth one hundred thousand dollars, and you were considering a replacement property worth at $10,000, the seller could make $90,000 worth of improvements to raise the property value. The completed improvements would constitute real estate. You could then buy the property for one hundred thousand dollars, fulfilling the requirement of equivalent value. the majority of sellers, however, will not be eager to perform these improvements so that you may successfullyconduct a 1031 exchange.

In the 2nd, more likely scenario a qualified intermediary who holds the proceeds from the sale of the relinquished property buys the replacement property from the seller, taking title to the property in a limited liability company, intermediary-owned company. The intermediary would then use the remaining money to construct the necessary improvements on the property. After construction is done, the intermediary transfers the replacement property to you, allowing you to complete the exchange process.

Back to the previously mentioned ten thousand dollar replacement property: the intermediary would purchase the aforementioned piece of real estate for the asking price and would make the required improvements using what is left of the proceeds, returning the replacement property to you when the property's value suffices to establish likeness with the relinquished property.

Although a Build-to-Suit exchange can go a long towards getting you the replacement property that you really want, it is important to take into consideration the amount of time required for the construction of necessary improvements. You have only 180 days to complete a 1031 exchange, so you need to be conscious of what can actually be brought to completion in this time span. Keep in mind that an improvement is only considered real estate when it is done, and so a renovation in the process of construction doesn't increase the value of the property. Although you may not be able to modify your replacement property as extensively as you might want, one hundred and eighty days is ample time to accomplish considerable improvements, and to bring your replacement property that much closer to your ideal.

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Real Estate Investors Often Hire 1031 Exchange Companies To Assist Them With Their Real Estate Tax Exchange. More Information Is Available At www.Top1031Exchange.com