Let’s say you have a property with a five-year lease that contains a right of first refusal to buy it. Within that lease it says on day one you can buy the property for $2 million but by the time you sell the property it’s worth $2.5 million. What establishes value for 1031 exchange purposes? Is it the amount that the taxpayer paid for the property or the higher, future valuation?
We did a deal in which the taxpayer bought their replacement property in downtown Minneapolis and they needed to buy a more expensive property. So as part of the transaction, we held it in a parking arrangement while doing a construction exchange and ultimately attached that building to the skyway system. The costs to construct the skybridge were not much but then the client hired an appraiser to establish a value that was even higher than what they paid out for the actual cost for constructing improvements.
The IRS would likely prefer to have the lower number used (the amount that was actually paid for improvements) but a judge might side with the higher value since it truly did enhance the value of the property after making this exchange.
1031 Exchange Professionals
If you have questions about determining value in your 1031 exchange, don’t hesitate to reach out to a 1031 exchange professional at CPEC1031, LLC. Our qualified intermediaries have more than twenty years of experience facilitating like-kind exchanges of real estate. We know the 1031 exchange process inside and out and can help you make the most informed decisions possible.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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