1031 Exchange for New Construction
New construction, when combined with a 1031 exchange, is a remarkable opportunity for significant tax advantages and investment growth opportunities. At 1031 Exchanges Guys, you’ll get expert management of new construction exchanges, allowing investment in tailored real estate projects.
What is a New Construction 1031 Exchange?
Also called Build-to-Suit or improvement exchanges, these let you use the proceeds from the sale of a relinquished property for new construction, improvements, and renovations on a like-kind property. If the value of the replacement property is less than the one you sell, improvements can increase the value enough to meet the requirements for full deferral of capital gains taxes.
Benefits of New Construction 1031 Exchanges
In a traditional 1031 exchange, you simply buy a like-kind replacement property; in a new construction exchange, you also use some of the proceeds from the sale to make improvements on the new property. This could include adding new buildings, renovating existing structures, or even building from scratch.
In total, the value of the replacement property (including improvements) must equal or exceed the value of the relinquished property. Making improvements allows for significant property appreciation, so long as the transaction is properly structured.
Financial Planning for New Construction 1031 Exchanges
To fully defer capital gains taxes, all of the exchange equity must be invested in products and services on the new property; any unused funds are taxable. Exchange Funds that have been placed in escrow for post-closing improvements do not qualify, even if the funds are deposited before you take the title.
If the exchange funds do not cover the acquisition and improvement of the new property, additional funds can be loaned to 1031 Exchanges Guys as the Qualified Intermediary, who in this type of exchange also acts as your Exchange Accommodation Titleholder (EAT). If you need a construction loan from an institutional lender, you should seek lender approval prior to starting the exchange. You can also partner with your developer, using a construction reserve in the exchange account.
Acting as project manager for the construction, you will send invoices to 1031 Exchanges Guys, as your EAT, to be paid directly to your vendors. During the exchange period, you cannot be reimbursed for any advances or expenses incurred. As you are allocating a budget for the construction project, always be aware of potential cost overruns!
Eligibility and Requirements for a Construction 1031 Exchange
As with all 1031 exchanges, the property must be for business or investment use and you must complete the transaction within a time frame. This can sometimes be challenging, as the replacement property must be identified within 45 days of the sale of your relinquished property, and acquired by the buyer within a total of 180 days.
The replacement property must include not only a description of the real estate in its current form, but also as much detail as possible about the intended improvements.
Project Planning and Execution
As with all construction and renovation projects, there can be costly delays. It is important to plan for these and work closely with your contractors and vendors in order to make sure that the 180 day deadline is met. This means reviewing plans, specs, and project documents, going over every detail of the scope of work.
It is also helpful to create and coordinate a master schedule with all parties and refer to it often, modifying it as needed, and implementing contingency plans that you have put in place. From there, communication and collaboration are key! You want to get regular updates on progress, monitored and documented, to ensure that you meet the deadline.
Financial Planning for New Construction 1031 Exchanges
To fully defer capital gains taxes, all of the exchange equity must be invested in products and services on the new property; any unused funds are taxable. Exchange Funds that have been placed in escrow for post-closing improvements do not qualify, even if the funds are deposited before you take the title.
If the exchange funds do not cover the acquisition and improvement of the new property, additional funds can be loaned to 1031 Exchanges Guys as the Qualified Intermediary, who in this type of exchange also acts as your Exchange Accommodation Titleholder (EAT). If you need a construction loan from an institutional lender, you should seek lender approval prior to starting the exchange. You can also partner with your developer, using a construction reserve in the exchange account.
Acting as project manager for the construction, you will send invoices to 1031 Exchanges Guys, as your EAT, to be paid directly to your vendors. During the exchange period, you cannot be reimbursed for any advances or expenses incurred. As you are allocating a budget for the construction project, always be aware of potential cost overruns!
Thousands of happy customers
