Due to a variety of factors, there is currently a nationwide shortage of new glass and windows. As a result, taxpayers conducting build-to-suit construction exchanges are finding it difficult to obtain and install new windows within their 180-day exchange period. What are the 1031 exchange requirements that these taxpayers need to be aware of and what are their options given the current situation?
Defining Like-Kind Property
First, let’s define what like-kind property is in a build-to-suit construction exchange. Only property that is actually incorporated and affixed to the building is considered like-kind real property in a 1031 exchange. Once an item of chattel or personal property (e.g., a 2x4 board) is pounded in and permanently made a part of the real property, it is considered qualified as like-kind property to complete a 1031 exchange.
Pre-paying for materials or labor that are not actually completed or incorporated and affixed to the real property within the 180-day exchange period will not qualify for the tax deferral under section 1031 of the Internal Revenue Code.
Defer all of the Gains
In order to satisfy the accounting requirements for a 1031 exchange (and defer all of the gains), the new replacement property generally needs to exist as real property and be of equal or greater value than the relinquished property that was disposed of.
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