A “Built-to-Suit” 1031 Exchange is a type of real estate transaction where an investor builds a property on a specific lot, with specific specifications, for the purpose of exchanging it for another investment property in a 1031 tax-deferred exchange.
Key-Takeaway
- The property must be built specifically for the purpose of the 1031 exchange.
- The investor must own the property under construction for a minimum of 180 days before it can be sold in a 1031 exchange.
- The investor must identify the replacement property within 180 days from the sale of the original property.
Example
An investor owns a rental property and wants to upgrade to a larger commercial building. Instead of finding an existing property that meets their requirements, the investor can purchase a lot, hire a builder to construct a building to their specifications, and then sell their rental property in a 1031 exchange to acquire the newly built commercial building.
Tips
- Hire a qualified intermediary to handle the 1031 exchange to ensure compliance with IRS regulations.
- Consult a real estate professional and tax advisor for advice on the 1031 exchange process.
- Keep detailed records of the construction process and expenses to ensure proper reporting for tax purposes.
Advice
- Be sure to thoroughly research and understand the requirements of a Built-to-Suit 1031 Exchange before beginning the process.
- Consider the timeline and potential risks involved in building a property for the purpose of a 1031 exchange.
- Have a clear plan in place for the replacement property to minimize potential delays and complications in the exchange process.
Recommendations
- Work with an experienced real estate professional who has experience with Built-to-Suit 1031 Exchanges.
- Plan ahead and allow enough time for the construction process and the 1031 exchange process.
- Seek the advice of a tax professional to ensure proper reporting and compliance with tax laws.
