Also known as Construction or Build to Suit Exchanges, Improvement Exchanges were designed to allow the client construct improvements to an existing property or to build new structures. This includes tangible assets, such as rail cars as well as real estate and its improvements. Constructing improvements on the replacement property allows the client to use the proceeds from the sale of the relinquished property to acquire land and construct improvements on the land.
Alternatively, if the construction period is too long the taxpayer may consider treating the transaction as either a Reverse Exchange or a Parking Exchange.
When the improvements are completed, but not later than the end of the exchange period, the intermediary transfers the completed replacement property to the taxpayer.
Any rental income derived from the replacement property during the exchange period should be added to the exchange proceeds and should not be paid to the taxpayer until the end of the exchange period. See PLR9428007
The improvements need to be identified within the 45 day identification period. The Exchange Intermediary will hold title to the improved asset until either the end of the exchange period or the date the improvements are finished.
While case law is clear that a client may not utilize a Section 1031 exchange to improve his own property, recent administrative rulings concerning Reverse Exchanges permits more flexibility to improve property owned by the client, provided it is transferred to the Exchange Intermediary for the requisite time period.
Depend upon Strategic Property Exchanges LLC and our Board Certified Tax Attorneys to guide you through your Improvement Exchanges.