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 Improvements to land you already own.
Sometimes taxpayers may be interested in building improvements on land they already own as replacement property in an exchange for another property. This structure is based on private letter rulings. As such, there may be associated tax risk. The taxpayer should consult with their tax advisor as well as the CPAs and Attorneys in our offices if they wish to pursue this exchange scenario. In general, here's how this process unfolds:
- A "Special Purpose Entity" (SPE) set up by the Accommodator enters into a special lease. If done properly the lease should qualify the improvements for exchange treatment.
- The SPE enters into a construction contract, guaranteed by the taxpayer, to make the necessary improvements to the leased land. The funds for the construction come from the taxpayer, a third party lender, or the intermediary, depending on the situation.
- When the improvements are completed (or completed to a point that satisfies the exchange), the SPE sells the leasehold interest to the taxpayer to complete the exchange.
- If the relinquished property has not yet sold, the SPE may continue to hold the leasehold interest until the sale of the relinquished property can be accomplished. In the meantime, the SPE may sublease the improvements to the taxpayer under a triple net lease.
SPECIAL NOTES:
- When construction cannot be accomplished within the 180-day period (the maximum time allowed in a delayed exchange), you may need to consider a reverse construction exchange technique which has it's own set of risks and considerations.
- Although Construction exchanges may offer solutions for replacement properties, it is imperative to have qualified professionals involved when considering these types of exchanges. Summit 1031 Exchange is one of few Qualified Intermediaries having CPAs and Tax Attorneys actively involved in the structuring of Construction exchanges. However, as with any complex tax scenario, you should also consult with your tax advisor before proceeding. We would be happy to meet with your tax advisors on any exchange topic you or they are concerned about.
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