IRC Improvement 1031 Exchanges – Everything You Need to Know
We have been getting more and more questions from clients about this type of 1031 exchange. An improvement exchange allows the investor to construct the “perfect” replacement property in order to acquire precisely what is desired. Improvements can be as simple as repairs to existing structures or as complex as ground-up new construction.
The improvement exchange opens up many opportunities to the savvy investor, even the possibility of improvements to property already owned! Sit down with David Moore of Equity Advantage as he walks though all you need to know about IRC improvement exchanges.
What You Will Learn
- Why time is even more critical with an Improvement Exchange
- How the process flows within the 180 day timeline.
- What happens if improvements aren’t completed at the time of transfer.
David Moore: Hi, David Moore with equityadvantage1031exchange.com. And we’re going to hit you with all things improvement exchange or at least the basics. So, in the crazy market we’re in, it’s obviously very easy to sell things, it’s hard to find things to buy, and with the current political situation, it’s even harder to get a green light to actually get that proverbial shovel in the ground property.
So anytime we’re looking at an improvement exchange, the biggest issue we’ve got to deal with any exchange for that matter is time, but with an improvement exchange, it’s that much more critical because you have to look at how long it’s going to take you to get the planning engineering and permitting set, so you can actually get that project started, so although you’re firmly aware that the 45, 180-day timelines are traps with any exchange, they’re very difficult with improvement exchanges.
Now, keep in mind, an improvement exchange, this means we’re going to be buying something that has to be improved or you want to improve, and then we’re going to convey that improved property to you, we cannot give you a property then have those improvements done at later day.
David Moore: So, it’s like with reverse exchanges, lending is going to come in the picture, and we’ve got to look at it and understand, okay, if you want to buy something and build on it, if there’s financing involved, who’s going to allow you to do that? And typically, you’re going to be looking at some type of portfolio lender, a bank that you know that’s going to allow us to take ownership to the project and then go vertical on it and convey that improve property back to you.
Now, I want to stress the project does not have to be done to have it satisfy your Exchange, but only what is completed and constitutes real property at the time of the transfer is going to qualify. So when we’re looking at an improvement exchange, that 45, 180 clock starts as it normally would on the 45th day, you’re going to identify the property you intend to buy and the improvements you intend to build on that property, we’re going to create that limited liability company in the exchange world that’s called an Exchange Accommodation Titleholder, “EAT” exchange, a condition, title holder, we’re going to take ownership of the property, build it out and then convey the improvements to you completing that transaction.
Now, as I said, the project does not have to be completed to satisfy your Exchange, but we’re going to be transferring that property back to you, either at a project completion to a level that meets your exchange value and equity requirements, or upon our exhaustion of your exchange proceeds or upon completion of that 180-day timeline, and one of those three things is going to have to happen, and actually we’re going to transfer before the 180th day, obviously, but we’ve got that 180-day timeline to build things out.
David Moore: Now, if you come to me, understand that a delayed exchange is a pretty inexpensive proposition these days, improvement exchanges are probably at least, if you’re working with us four times as much… Four or five times as much as it’s a delayed exchange. And the reason for that is that we literally take ownership to the project, we cannot give you a property then do improvements at a later date, the improvements have got to be done before you take ownership and no escrow hold backs, do not qualify. So you can’t close on a property, have money sitting in escrow for you to go do improvements later, we’re talking about having to build something that convey the improved property to you. The improvements could be just the dirt and a foundation even, but we’re just going to race through that 180 day timeline to get those improvements done, I would say the easiest way to have minor improvements done is just to simply ask the seller to do the work, build it in the purchase price and get it done that way.
An improvement exchange in and of itself really doesn’t pencil on this, you’re probably doing at least $30,000 worth of work just because the additional cost of the exchange is going to pretty much mitigate any benefit if you’re looking at a, let’s say, a $7000-$8000 transaction, most places, that’s going to convert to maybe $24,000-$30,000 in boot, and you’re going to have to do it within our timelines, and as I said, if there’s financing involved on that project, it’s going to have to allow us to take ownership, there might be additional cost there, so if you’re contemplating an improvement exchange, think in the context of, it’s got to be larger projects, anything, it’s like the lender required, let’s just build in the perch price ask the seller to get it done and just buy a property. So that’s going to be a normal delight exchange.
But as I said again, with an improvement exchange, it’s going to be a bigger project, we’re literally going to take ownership of the project, build it out, you’re going to oversee the improvements as normally would, and then when one of those events occurs, either the exhaustion of the timelines, exhaustion of your funds or we meet the project requirements, we’re going to convey that project back to you, and if it’s complete, great. If it’s not, you can finish the project at your leisure and get you where you want to go.
David Moore: So I hope this has helped. It’s just been down and dirty, quick description of improvement exchanges. If you want more details, please don’t hesitate to reach out equityadvantage1031exchange.com and take a look at our YouTube channel. Thank you, and I look forward talking again soon.
A more in-depth read: 1031 Improvement Exchanges
Navigating 1031 exchange options takes a professional, and you can count on the whole team at Equity Advantage to help. Your investments are just too important not to have an expert on you team. Give the folks at Equity Advantage a call, 503-635-1031, to get started!