What is an Improvement Exchange?

Improvement exchanges allow you to use the proceeds from the exchange of your relinquished property to make improvements to the replacement property. This usually happens when the fair market value of the replacement property is less than that of the relinquished property. If you were to simply acquire the replacement property and construct the improvements, the improvements would not qualify as like-kind property. Therefore, you cannot take title to the replacement property until the improvements are completed. Typically, the Qualified Intermediary (QI) (or an affiliate of the QI, such as Reverse 1031 CORP.) will create a special purpose entity (SPE) to take title to the replacement property directly from the seller, sign the contract with the builder and have the improvements completed. Once the improvements are completed, the SPE conveys title to you at the higher price to complete your 1031 exchange.

• The improvements must be identified within the 45-Day Identification Period and title of the improved property must be transferred to you by the end of the 180-Day Exchange Period. It is not necessary for the improvements to be 100% complete prior to title being acquired from the SPE and your price of the replacement property will be equal to the original purchase, including costs, plus the improvements completed and paid for at the time of transfer. However, the replacement property must be substantially the same property that was identified.
• Improvement exchanges do require more planning than a typical delayed exchange but are an excellent solution if you want to use exchange funds to make improvements to the replacement property. To maximize the 180-Day Exchange Period, arrangements should be made so the SPE can take title to the property soon after the relinquished property is conveyed to a buyer. All permits should be secured, the contract with the builder signed and financing in place so construction can begin immediately.
• There are additional expenses including fees for the SPE and transactional expenses to the closing agent. There may also be duplicate title insurance premiums, loan costs and transfer taxes. Request a consultation with our 1031 CORP. Exchange Officers to discuss your exchange.