Many people we talk to want to build improvements on property that they already own. What if you can’t find replacement property for your 1031 exchange but you have underused raw land? What if you own an office building with a huge surface parking lot that’s being under-utilized. This seems like a perfect target for a build-to-suit exchange, but the problem is you already own it.
Leasehold Estates
There are a couple of cases that stand for the proposition that you can’t build on land that you already own. The IRS has taken the position that such a transaction is not an exchange because you’re not receiving anything new. They think of it the same as paying down a mortgage on a property you already own. That was the position of the IRS for decades.
Then a private letter ruling came out that created a new leasehold estate that’s owned by the tenant. The tenant can construct improvements on this land and that could be the replacement property. The problem is that the IRS changed Rev. Proc. 2037 (the reverse exchange safe harbor that’s used in this paradigm) and they said you can’t park a property that’s previously been owned by the same taxpayer if the taxpayer owned it in the last 180 days. If you want to remain in the safe harbor when you own both the relinquished property and the replacement land, the first step is to move the replacement raw land into a different entity such as a partnership. Then you let it sit for at least 180 days. After that period you can commence the leasehold estate.
CPEC1031 – Like-Kind Exchange Professionals
Like-kind exchanges come with a variety of rules and requirements. These guidelines are hard and fast. If you run afoul of any of them, your exchange could be jeopardized. For that reason, it’s essential to work with a qualified intermediary who understands the process. The intermediaries at CPEC1031 have decades of experience in the 1031 exchange industry. Our team of like-kind exchange professionals can help guide you through the entire exchange process from start to finish, making sure you have a complete understanding of the requirements every step of the way. Reach out today to see if we can help with your next 1031 exchange!
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2023 Copyright Jeffrey R. Peterson All Rights Reserved