A Reverse/Improvement Exchange, also known as a Build-to-Suit Exchange, is a type of 1031 Exchange in the United States that allows real estate investors to defer the recognition of capital gains tax. The key idea behind this exchange is to acquire a replacement property before selling the existing property.
- Deferral of Capital Gains Tax: By conducting a Reverse/Improvement Exchange, real estate investors can defer paying capital gains tax on the sale of their existing property.
- Flexibility: This type of exchange offers more flexibility to the investor compared to a traditional 1031 Exchange. The investor can acquire the replacement property before selling their existing property and make improvements to the replacement property before exchanging it.
- Three-Party Structure: A Reverse/Improvement Exchange involves three parties: the investor, the Qualified Intermediary (QI), and the property owner. The QI holds the sale proceeds of the existing property and facilitates the acquisition of the replacement property.
An investor owns a commercial property and wants to exchange it for a larger commercial property. However, the replacement property is not yet available. In this scenario, the investor can conduct a Reverse/Improvement Exchange, acquire the replacement property and make necessary improvements before exchanging it.
An investor owns a residential property and wants to exchange it for a larger residential property with a pool. The investor can conduct a Reverse/Improvement Exchange, acquire the replacement property, and have the pool installed before exchanging it.
- Hire a Qualified Intermediary: Hiring a QI is a must for a Reverse/Improvement Exchange. The QI will assist with the exchange process and ensure compliance with the 1031 Exchange rules.
- Plan Early: Planning for a Reverse/Improvement Exchange takes time. It is important to start the planning process early to ensure that the exchange is completed within the specified timeframe.
- Follow the Guidelines: The guidelines for a Reverse/Improvement Exchange are complex and strict. It is important to follow all the guidelines to avoid any issues and ensure the success of the exchange.
A Reverse/Improvement Exchange is a great way for real estate investors to defer the recognition of capital gains tax and acquire a replacement property before selling their existing property. However, it is important to follow the guidelines and plan the exchange carefully to ensure success.