In some 1031 Exchanges, the taxpayer may want to have new construction or significant improvements to the replacement property. Improvement and construction exchanges can be tricky. That’s because the process does require the use of a concept which we use in reverse exchanges.
In some cases, the Replacement Property requires new construction or significant improvements to be completed in order to make it viable for the specific purpose that an exchanger has intended for it.
This construction or these improvements can be accomplished as part of a structured exchange process with payments to contractors and other suppliers being made by the facilitator out of funds held in an exchange account.
Also, if the Replacement Properties of lesser value than the Relinquished Property at the time of the original transaction.
The improvements or construction can bring the value of the Replacement Property up to an exchange level or value which would be equal to the Relinquished Property thereby allowing the transaction to remain fully tax deferred.
Improvements in construction exchanges can be tricky however that’s because the process does require the use of a concept which we use in Reverse exchanging.
Namely a parking of the title until such a time as the improvements are done or the 180 days is nearing completion.
This is because technically you cannot Exchange in a property already own so, if you bought the replacement and then did the improvements the value added would not count towards your exchange.
That is why we must use what is called an eat or exchange accommodation title holder.