Build-To-Suit Exchanges

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Build-To-Suit Exchanges – Capital 1031 Exchange Company

Build-To-Suit Exchanges - Capital 1031 Exchange Company This type of exchange gives the taxpayer the opportunity to use all or a portion of the exchange proceeds for construction of a replacement property or major improvements to a replacement property. A build-to-suit exchange begins like a typical delayed exchange, with the taxpayer’s sale of relinquished property. When the taxpayer enters into an agreement of sale to purchase the replacement property, the taxpayer will enter into a QEAA (Qualified Accommodation Exchange Agreement) with the Qualified Intermediary and the Holding Entity (a single member LLC) who holds title to the property.

The taxpayer assigns his/her rights in the purchase agreement to the Holding Entity so that they may use the proceeds of the sale of the relinquished property to acquire a fee interest in the replacement property and to complete the identified improvements.

On the Holding Entity’s behalf, the taxpayer or the taxpayer’s contractor arranges for the construction to be completed on the replacement property. At the completion of the construction, or prior to the end of the 180-day exchange period of the replacement property, the terms of the QEAA will be satisfied and the Holding Entity will then transfer the member interest of the LLC to the taxpayer. Construction to be included in the exchange must be built and paid for prior to the transfer of the property to the taxpayer.

It is also important to understand that the property to be acquired and the improvements to that property must be identified on or before the 45th day after the sale of the relinquished property, and all improvements to be included in the exchange must be completed within 180 days from the date of closing on the relinquished property.

When a client has found a replacement property, which is still under construction, a Build -To-Suit Exchange may become necessary.

Build-to-Suit Exchanges are more complex than a straight deferred exchange and require more time and effort. Like a reverse exchange, the IRS requires the utilization of a parking entity in a build-to-suit exchange. Typically, the parking entity takes title to the replacement property. In order to effectuate a build-to-suit exchange, the exchange must be carefully planned, prior to the sale of the relinquished property and the purchase by the parking entity of the replacement property.

Key issues to consider when planning a Build-to-Suit

Build-To-Suit exchanges are best used on properties that will reach completion within the 180 day exchange period.
Where construction financing will be necessary, some lenders might not allow a parking entity to hold title to the replacement property
The parking entity will need to be insured during the 180 day holding period.
There may be additional state and local transfer taxes that could be triggered in transferring the property to a parking entity during the construction period.
The owner of the replacement property, prior to the exchange, must be a third party. Land owned by the taxpayer prior to the exchange is not qualified for a build-to-suit exchange.’
The added complexity of a build-to-suit exchange will usually require additional time and expense including attorney fees that will be incurred by the taxpayer.

Build-To-Suit Exchanges | Capital 1031 Exchange Company

Terminology for 1031 Exchanges

Adjusted Basis

The adjusted basis is equal to the purchase price, plus capital improvements, less depreciation.

Boot

In an exchange, any funds not used to purchase the replacement property are considered boot, as well as the fair market value of any non-qualified (not “like-kind”) property received in the exchange, such as cash, notes, furniture, supplies, or reduction in debt obligations. The Exchangor pays taxes on the boot to the extent of recognized capital gain.

Capital 1031 Exchange Company

A Qualified Intermediary as defined in the Internal Revenue Service Treasury Regulations.

Direct Deeding

At the direction of the Qualified Intermediary (“QI”), title is conveyed directly to the ultimate owners without the QI actually having to be in the chain of title, thus avoiding the imposition of additional transfer tax.

Exchange Period

Time allowed for the Exchangor to acquire the replacement property in a delayed exchange, or the time allowed to dispose of the relinquished property, in a reverse exchange. In a delayed exchange, the time period begins on the day the relinquished property is transferred, or the exchangor relinquishes control of the property. It ends on the earliest of the 180th day after the transfer, or if no extension is applied for, then on the day the Exchangor’s tax return is due.

Exchangor

The property owner(s) seeking to defer capital gain tax by utilizing a 1031 Exchange.

Identification Period

Within 45 days after the close of the relinquished property, the replacement property must be identified in accordance with one of the three adopted rules.

Like-Kind Property

Refers to the nature or quality of the property the Exchangor gives up or receives in the exchange, such as real property for real property. Real property does not have to be similar in use, such as raw land for raw land. Raw land may be exchanged for any other real property that will be used in a trade or business or held for investment.

Real Property located in the United States and Real Property located outside the United States are not like kind.