Bridging the Value Gap in a 1031 Exchange

In a typical 1031 exchange, the taxpayer sells their property, parks their money with the qualified intermediary and then starts looking for their replacement property. But what if the replacement property they find is $130,000 less valuable than the relinquished property? How can you fix that gap in value?

If the property you’re buying is an ugly duckling and could use some work, you could build improvements in a build-to-suit exchange. The intermediary can form an LLC and acquire the property while the taxpayer arranges for the construction to occur. These improvements need to be finished within 180 days. Many people think they can buy the replacement property and then remodel it. Unfortunately, the IRS takes the position that once you own the property, any improvements that you make to it post-exchange don’t count for 1031 purposes.

There are two ways to fix that problem:

  1. You can go to the seller and ask them to do the $130,000 of improvements to the property before the sale. The seller is almost certainly NOT going to agree to that, as it’s a very risky endeavor on their end.

  2. You can go through a qualified intermediary who can come in as an exchange accommodation titleholder and hold the property while you arrange for the remodeling.

In any case, you want to make these improvements so that you can be sure that your replacement property is minimally equivalent in value to your relinquished property.

Exchange Your Investment Property in a 1031 Transaction

Exchange your investment or business property in a 1031 transaction and defer your capital gains taxes! The intermediaries at CPEC1031, LLC are here to help you navigate the details of your next like-kind exchange. We can help prepare all of your required documentation and work with your CPA, real estate broker, or other members of your team to ensure that your exchange is a success. Our offices are located in the heart of downtown Minneapolis. We work with taxpayers conducting exchanges of real estate throughout the United States.

  • 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.

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Defer the tax. MAXIMIZE your gain.