In 2004, the IRS augmented the 1031 exchange guidelines. This new revenue procedure outlined that a taxpayer cannot take title to and park a piece of real estate that’s been owned by your 1031 exchangor within the last 180 days. Essentially, the IRS did not want the qualified intermediary parking properties that were already owned by the taxpayer. This new revenue procedure was intended to prevent taxpayers using the expansive power of the previous revenue procedure to construct improvements on land already owned by the taxpayer.
In 2008, the IRS issued a private letter ruling in response to a situation in which a taxpayer had inadvertently purchased their replacement property first, buying it through a disregarded single-member LLC. That taxpayer asked the IRS if there was any way to rectify this situation. They proposed that instead of constructing the improvements on the title that the taxpayer already owned, they would rather curate the facts so there’s a long term ground lease of at least thirty years on that parcel and the lessee is the exchange accommodation titleholder (the intermediary). In this situation, the intermediary would own the ground lease and construct the improvements on top of that ground lease. Then, ultimately the taxpayer doing the exchange would receive the ground lease, plus the constructed improvements, at the end of the process. The IRS agreed that this was OK. And thus, the modern build-to-suit exchange was born.
1031 Case Example: Downtown Minneapolis
In downtown Minneapolis, there’s a beautiful architectural building that had an underutilized flat surface parking lot. The taxpayer who owned that property sold a relinquished property in St. Paul (an apartment building) and couldn’t find any suitable replacement property so they utilized their existing flat surface parking lot to construct an apartment complex in a 1031 transaction.
Contact a 1031 Exchange Accommodator
Contact a 1031 exchange accommodator today to talk in detail about the tax-saving benefits of a like-kind exchange. If you’re a US taxpayer who owns qualifying investment real estate, you can avail yourself of the benefits of section 1031. You don’t need to be a big time investor either. Many of the clients we work with are small, family-owned businesses. Anyone can take advantage of a 1031 exchange to reduce their capital gains tax burden when selling real estate. Reach out to a qualified intermediary at CPEC1031, LLC today to learn more about the process of exchanging your property and deferring your capital gains taxes.
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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